Among the more interesting questions in the FX market these days is: Why the failure to reach a deal in Doha had no significant impact on the global markets?
The answer to this question is central for the near-term outlook of the G10 commodity currencies.
The resilience of the commodity prices reflects investors’ confidence that global demand could hold up for now given the stabilizing outlook for China (and other EMs like India). The approaching US driving season is also seen as a boon for the oil prices.
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On the supply side, the failure of the oil producers to reach an agreement may have been less damaging given that any freeze would have kept global oil production at close to record levels. Investors further seem to expect that a persistent drop in the US shale oil production should be the key driver of any future correction of the oil market imbalances.
Next to stable commodity prices, a dovish Fed and abating fears of hard landing in China are supporting the G10 commodity currencies.
On the face of it, there is little to point to a potential reversal of the latest rally in the near-term.
Further out, stable commodity prices should ultimately shift investors’ focus to the inflation outlook as an FX driver and USD should benefit from the fact that the US has one of the highest (core) inflation rates in G10.
