The US Treasury report on currency manipulation was ordered by Donald Trump to address the issue of countries manipulating their currencies, normally to devalue them and give an unfair advantage to their own exporters.
The report is expected to be published mid-April and it expected to have a strong impact on the currency markets.
Another market, the findings may impact is that of Gold, which is heavily influenced by sentiment flows as it is used as a safe-haven in times of stress.
If they are made, allegations of currency manipulation are likely to create greater geopolitical tensions, increasing demand for the precious metal. The most gold-bullish outcome would be if the report actually named a big country a currency manipulator, according to James Steel, Chief Precious Metals Analyst at HSBC.
“This is potentially the most bullish scenario for gold, despite likely USD strength, as outlined by the FX team. There is a long running inverse correlation between the USD and gold and under normal circumstances a strengthening USD would be expected to weigh on gold prices. In this scenario however we do not believe a strengthening USD would necessarily undercut gold prices, as such a scenario could increase gold’s appeal as a safe haven. It is possible in this scenario that both gold and the USD attract flows simultaneously,” added Steel.
The naming of a large country, such as China, for example, as a currency manipulator could trigger risk-off trading which would benefit bullion.
Another possibility is that the report labels a small country as an FX manipulator. This would result in milder gold gains due to the moderate risk aversion associated with such a release.
The third possibility, according to HSBC, is that without naming and shaming a particular country big or small, the “US Treasury ratchets up the rhetoric.” This is HSBC’s base case scenario and would be expected to be neutral or modestly bullish for gold prices.
The treasury could cite some countries as having ‘currency misalignment’. “In this scenario, the FX team suggest the USD could weaken as policy makers elsewhere become more tolerant of local currency strength for fear of being named.” Gold prices would rise as a result of its inverse relationship with USD.
“No notable changes from previous report: neutral/modestly bullish gold. Although the FX team believe it is very unlikely, the US Treasury could decide to deviate very little from its previous publications. If this is the case, then the USD would likely weaken as it could suggest the US administration’s rhetoric appears to be ‘more bark than bite’.”
However, on the downside for Gold prices is that fact that a due to a lack of safe haven buying gold’s appreciation would be limited. As such the bull move would be dependent, “on the severity of the USD decline,” concluded Steel. – Joaquin Monfort
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