Gold traded quietly during a holiday-lulled session as traders are trying to gauge the impact for gold of rising geopolitical tensions in Hong Kong.
For gold, what’s critical about China's stance on Hong Kong security is its impact on US-Sino relations. Gold tended to rally through 2019 when relations between the two nations deteriorated while pulling back when they seemed to improve. And there are other geopolitical hotspots; the US has warships in the vicinity of Iranian freighters headed for Venezuela this weekend, which is under embargo.
There are more than enough hot spots in the world to keep a bid under gold despite the slightly stronger dollar, which is competing for safe-haven flows.
Arguably, however, the clouds of dust in Hong Kong have settled quicker than anyone had expected, which isn't so bullish for bullion over the short term. Much local buying of late was done as a hedge for a rapid escalation of trade tensions between the US. and China, and so far that hasn’t happened.
Ultimately over the short term, and in the absence of a secondary virus outbreak, gold's latest foray higher could be met with resistance amid renewed economic optimism around economies re-opening and a potential vaccine.
Deteriorating US-China relations are a crucial driver of China abandoning its growth target and trade war risks will continue homing in on Hong Kong in the short term. Even with the dust settling quicker than expect over Hong Kong, FX markets will continue to price in trade war risk premium in both CNH and HKD and should keep both currencies on the defensive for some time.
Despite the mutualization surprise, the Euro is getting weighed down by US dollar safe-haven flows and, to a large extent, China abandoning its GDP target and not providing the deluge of stimulus the market expected Still, on the straight-up quasi-fiscal union trade, bears persist.
Debt mutualization is something the market has basically been craving since the creation of the currency. At the end of the day, getting all countries on board could still be a pipe dream.
The Malaysian Ringgit
The Ringgit is caught between the tug of war of stabilizing oil prices and heightened US-China trade tension. Sadly, the latter will be a significant concern going forward since President Trump has made it clear that his election campaign will be laced with anti-China rhetoric. He and the US administration’s China hawks perceive China was less than transparent in how they handled the coronavirus crisis.
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