Gold: US treasury currency report may support bullion - HSBC

James Steel, Chief Precious Metals Analyst at HSBC, explains that the US Treasury currency report is expected mid-April and its potential findings carry asymmetric upside risks for gold as most gold bullish outcome would be if a big country were named currency manipulator, even if USD strengthens.

Key Quotes

“The US Treasury’s semi-annual report on “Foreign Exchange Policies of Major Trading Partners of the United States” is expected to be released soon, perhaps as early as mid-April. Given the stronger rhetoric from the new US administration on trade protectionism and unfair currency practices the attention on the report should be significant. We maintain our bullish price outlook. We assess what each scenario outlined by the FX team may mean for gold:”

“1) US Treasury names a big country as an FX manipulator: gold rallies

There is the possibility that the administration will carry through with campaign comments to name China a currency manipulator. However, the FX team believe such a move is unlikely. This is potentially the most bullish scenario for gold, despite likely USD strength. 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, 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.

Another reason gold would likely rally is that the naming of a major country as a currency manipulator could trigger risk-off trading, which almost always benefits bullion. In general economic uncertainty can restrict the spectrum of financial assets for investing during turmoil, leaving gold as one of the few liquid, perceived safe investment objects in a time of crisis or elevated stress. And while the naming of a currency manipulator may not trigger a crisis, it could elevate international stresses.” 

“2) US Treasury labels a small country as an FX manipulator: mild gold gains

 Alternatively, the US Treasury could label a smaller country. After all, this could also serve as a warning to other larger nations. We believe such a scenario would lead to modest USD strength as the markets return to a risk-off tone.”

“3) US Treasury ratchets up the rhetoric (base case): neutral/modestly bullish gold

This is our FX research team’s base-case scenario. The team expect the US Treasury to use much stronger language in its report, but without explicitly naming any one country a currency manipulator. This report would then be perceived to be a credible threat – in contrast to the past – and these issues would ‘go live’ according to the team. Gold is also likely to gain in this scenario but our rationale is more straightforward. In this case we believe gold is more likely to react to USD strength than to outright increases in protectionism or rising tensions. That said there may also be a modest element of safe haven buying. But we do not expect gains to be significant, unless the USD weakens notably.” 

“4) 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’.

Gold may strengthen on an outright basis due to anticipated USD weakness as a result of the report remaining essentially unchanged. But the lack of safe haven or quality asset buying would limit gold’s appreciation. The bull move would be dependent on the severity of the USD decline. Essentially the possibility of a currency war or rise in protectionist sentiment is traditionally positive for gold.”