What's Doha Got To Do With FX?

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This weekend’s meeting of OPEC and non-OPEC members in Doha is important for currencies because when oil bottomed at the beginning of the year it set a peak for the U.S. dollar. If you recall, the greenback was trading strongly when oil prices hit a 10-year low of $26.20 a barrel and when oil started to recover, the dollar index lost its momentum and began trading sharply lower. So not only is the dollar’s value important for oil, but in recent years we’ve also seen how it can impact currencies and equities. Oil is particularly important to the Canadian dollar but it can also affect the market’s overall risk appetite. For the past few months, investors have been patiently waiting for oil-producing nations to officially freeze production. In mid February, Saudi Arabia and Russia, the world’s two largest oil producers made a preliminary deal to freeze output -- but it was contingent on Iran’s participation. Unfortunately, Iran supported the deal but refused to comply until its production returned to pre-sanction levels.

This weekend we'll see if oil producers are willing to move forward without Iran’s cooperation. If they agree to freeze production, relieved investors will reward the decision with higher oil prices, rallies for stocks, a lower U.S. dollar and stronger commodity currencies. But in order for there to be any real continuation, oil producers need to cut output -- and that’s unlikely. Saudi Arabia and Russia are producing oil at record levels and an output halt would still mean 300 million extra barrels of oil per year for the world -- excluding the added inventory provided by Iran. The International Energy Agency believes that a deal would not rebalance supply before 2017. A production cut was far more likely when oil was below $30 a barrel but at $40, the pressure to make any drastic change is limited. Of course, in the event of no deal, oil prices will collapse, commodity currencies will fall, stocks will extend lower and the dollar will rise as risk aversion returns to the markets. Either way, the Doha meeting is an extremely important event risk for the FX market this weekend.

The U.S. dollar traded lower against all of the major currencies Friday on the heels of mostly softer U.S. data. Although manufacturing activity in the NY region expanded at its fastest pace in more than a year, industrial production contracted sharply and consumer sentiment hit its lowest level in 7 months. Americans are concerned about the upcoming election, wage growth and household finances, which may explain why spending has been so weak. Outside of a few upside surprises, most of this week’s U.S. economic reports highlight the ongoing challenges in the U.S. economy. Not only will the Federal Reserve refrain from raising interest rates in 2 weeks, but the FOMC statement could contain slight downgrades to their assessment of the economy. We expect the dollar to resume its slide in the days and weeks ahead. USD/JPY is looking particularly vulnerable as more earthquakes hit the south of Japan Friday prompting a tsunami warning.

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Doha talks delayed as Saudi Arabia requests last-minute changes The oil output freeze talks in Doha today encounter more issues. Yes folks, the Doha debacle continues as just that with the planned talks now delayed until later today after ministers go to meet the emir of host country Qatar.

Reuters sources claim the talks have been delayed by an hour due to last-minute changes requested by OPEC's def facto head Saudi Arabia who have asked all OPEC members to participate in the freeze.

An OPEC source said:

"The Saudis changed everything early this morning. They want all OPEC members to join first."

Yesterday I reported that Iran will not be attending while Adam followed up with comments from Saudi Price Mohammed bin Salman who has taken a tough stance on Iran, the only major OPEC producer to have refused to participate in the freeze. Tehran says it needs to regain market share after the lifting of international sanctions against it in January.

Given the importance of oil price/quotas to the current fragile global economy this circus is unwelcome and potentially extremely damaging.

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Doha Talks Restart After Delay Talks between the world’s leading oil producers about potential production freeze restart in Doha, Qatar after several hours of delay to change the wording of the agreement.

Global oil giant Saudi Arabia needed to address its stance on Iran as country increases its production capacity after spending years in economic isolation after international sanctions were imposed on Teheran.

"The general agreement is in place," Wilson Pastor, Ecuador’s OPEC representative, told Bloomberg in Doha.

"Now there is some disagreement on the wording and maybe this afternoon we are going to finish," Pastor said, adding that details on the monitoring of the agreement and a follow-up meeting were also to be finalized.

The commodity market is likely to open lower in early Asian trading if no deal materializes.

"Negative sentiment is set to prevail at the beginning of the week after no deal is done in Doha," Ladislav Benedek, senior forex trader at Intesa Sanpaolo in Bratislava, said for WBP Online on Sunday.

"Should a no deal situation block the Saudis from further negotiations with Iran for longer, I expect the risk of contamination for other markets building up quickly with forex market sentiment hit first," Benedek further added.

The news of Saudi Arabia conditioning any output freeze deal broke as early as the beginning of April.

"If all countries including Iran, Russia, Venezuela, OPEC countries and all main producers freeze production, we will be among them," Saudi Deputy Crown Prince Mohammed bin Salman repeatedly said.

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