The Doha round of negotiations to freeze oil production has ended in failure due to KSA's insistence on Iran's full participation in any production freeze. Given that Iran is unlikely to participate in any deal any time soon, the latest developments have undermined investors' confidence in OPEC's ability to agree on measures to tackle the oil oversupply concerns. All that came as a disappointment for the investors who have been buying commodity and risk-correlated currencies hoping for a turnaround in the oil price outlook. CAD, NOK as well as AUD could remain vulnerable against safe-haven currencies EUR and JPY.
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Investors' kneejerk reaction was to also sell USD. Given that the latest slowdown in the US economic activity partly reflects the precipitous drop in business investment in the mining sector, lower oil prices in the wake of the Doha meeting could mean further risks to the domestic economic and hence the Fed outlook. As we have repeatedly argued in the past, however, a lot of negatives seem to be in the price of USD by now and we doubt we will see a sharp selloff of the currency. Indeed, according to our long-term fair value model, the latest drop in USD TWI has brought it back close to fair value after a period of sustained overvaluation.
JPY has emerged as the winner of the risk selloff at the start of the week, being the strongest G10 FX currency. It also helped the currency that the G20 statement released last week reiterated the members' commitment not to engage in competitive devaluation. All that said, we believe that the scope for sustained USD/JPY downside could be limited. For one, we note that the G20 statement further envisaged official involvement in the markets in the event of disruptive FX moves. Japan's Finance Minister Aso and Governor Kuroda further expressed their concern about the excessive JPY-moves of late while highlighting the G20 acceptance to further easing measures including negative rates. Weaker oil prices in the aftermath of the Doha meeting will dash hopes for a sustained revival of the Japanese inflation giving the BoJ more reasons more reasons to ease further (next BoJ meeting is on April 28).