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Gold is cheap amid a stronger dollar in anticipation of a U.S. Federal Reserve meeting

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why gold is getting cheaper

Gold prices fell Monday due to a strengthening dollar as investors braced for aggressive interest rate hikes by the U.S. Federal Reserve and other central bankers trying to tame rising inflation.

The spot price of gold fell 0.59% to $1,665.04 a troy ounce. The dollar index rose 0.3 percent, making the metal more expensive for holders of other currencies.

Why is gold getting cheaper? The Federal Open Market Committee will begin a two-day meeting on Sept. 20 and announce its rate decision Wednesday. The markets are fully priced in a 75 basis point rate hike. 

Most regulators meeting this week, from the Swiss central bank to the South African central bank, are expected to raise rates. As for the Bank of England, market participants are divided on the size of the move: some think there will be a 50 basis point increase, while others think it will be 75 basis points.

Earlier, we reported that South Korea considers options to combat won vs. dollar exchange rate volatility

Forex

Hong Kong dollar crisis: Traders increase their bets on Hong Kong dollar decline

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Hong Kong dollar crisis

Hong Kong dollar crisis: Traders increased their positions on the Hong Kong dollar decline. The exchange rate of this currency fell by almost 1% after an 18-month peak in December. The decline of the inter-bank loans rate resulted in the widening of the gap with rates similar to those in the U.S. to the maximum since 2008. The wide spread made it profitable to buy Hong Kong currency – traders could borrow it cheaply and sell it for U.S. dollars, which have higher rates.

Are we in for a Hong Kong dollar collapse? 

The benchmark foreign exchange market in Hong Kong HIBOR (Interbank Offered Rate) has gone into a decline. Now HIBOR is 160 bps lower than LIBOR, which is calculated for several currencies, including the U.S. dollar. For comparison: in early December HIBOR was 90 bp above LIBOR. Today the Euro / U.S. Dollar rate looks more optimistic. 

According to Kelvin Lau, senior economist at Standard Chartered (LON:STAN) Bank Hong Kong, the fall in the Hong Kong dollar was exacerbated by the high-base effect.

“The combination of a less tight Fed rate outlook and improved prospects for a resumption of local market operations likely fueled expectations for renewed capital inflows,” Lau said.

Banks expected limited currency liquidity after the holidays in December, but their initially pessimistic forecasts didn’t materialize. Analysts at Oversea-Chinese Banking believe the USD/HKD pair is likely to remain above the 7.80 level in the short term. The growth potential of the HIBOR – LIBOR spread is limited, experts said. The exchange rate of HKD was 7.83 on January 27.

Bill Ackman, founder of hedge fund Pershing Square (NYSE:SQ), said last November that he was betting on Hong Kong’s currency falling and ending its peg to the U.S. dollar. Hayman Capital founder Kyle Bass and billionaire George Soros shared the same pessimistic view of Hong Kong’s currency.

Earlier we reported that Brazil and Argentina want to create their own “euro”.

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Brazil and Argentina currency: countries want to create their own “euro”

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the common market arrangement that groups Brazil Argentina

A new Brazil and Argentina currency will soon appear on the Forex market? Brazilian President Luiz Inacio Lula da Silva and Argentine President Alberto Fernandez announced in a joint article that they had decided “to intensify discussions of a common South American currency, which can be used to serve both financial and trade flows, reduce transaction costs and foreign economic vulnerabilities.

What’s known about the initiative

Back in 2019, then-Brazilian President Jair Bolsonaro said that Brazil and Argentina were preparing to take the “first step” toward “the dream of a single currency.” At the time, the idea was met with skepticism in Brazil.

In 2021, Brazilian Economy Minister Paulo Guedes said that in a potential currency union, Brazil could take on the role played by Germany in the eurozone. But it is unlikely that the sur currency could fully compete with the euro and dollar.

The sur currency would not replace the real and Argentine peso — at least at first — and would be used in parallel with them, the Argentine publication Perfil specifies.

Brazilian Finance Minister Fernando Addad stressed on Sunday, January 22, that the two countries have a new tool to strengthen mutual trade and do not intend to give up their own currencies. According to Bloomberg, talks are at a very early stage and no target date has been set. The common market arrangement that groups Brazil and Argentina, should be thus stimulated.

Why a “common currency” is needed

Explanations from Brazilian and Argentine officials show that there is no question of creating a currency union similar to the eurozone. “We need something that allows us to increase bilateral trade, given that Argentina is one of the countries that buys finished goods from Brazil and our exports there are declining,” the head of the Brazilian Ministry of Finance pointed out (quoted by Bloomberg).

In December 2022, Argentina’s Buenos Aires Herald website reported, citing sources, that “the focus would be on creating a common currency,” a concept that differs from “a single currency because it does not involve abandoning the national currencies of Brazil and Argentina.” Such a currency would allow Argentina to buy Brazilian goods without having to spend dollars from reserves, the publication argued.

Earlier we reported that Japan and China gave up first place to the EU as the world’s largest importers of LNG.

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Japan and China concede first place to the EU as world’s largest LNG importers

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world's largest lng importers

The balance of power among the world’s largest LNG importers in 2022 has changed completely – with a huge gap to first place going to the European Union as a collective buyer, the second place was occupied by Japan, and China from first place in 2021, moved to third.

EU

According to Gas Infrastructure Europe, the EU used a total of 98 million tons of LNG in 2022 (127 billion cubic meters of gas after gasification), which again makes it the cumulative largest LNG importer in the world.

Japan

Japan cut LNG imports by 3 percent to 71.997 million tons in 2022, the country’s Finance Ministry said Thursday. The average price of LNG imports in 2022 has almost doubled to $657 per thousand cubic meters after $384 in 2021. Meanwhile, the spot price in the region (JKM Platts index) was at $1,214 per thousand cubic meters in 2022.

China

LNG shipments to the PRC in 2022 are expected to be about 63 million tons, which, with any actual result of customs statistics for December, is significantly below the volume of Japanese purchases.

For the first 11 months of 2022, China imported 65.935 million tons of LNG, down 8% from January-November 2021. December could add up to another 7 million tons.

The main reason for the decrease in energy imports in 2022 by 2021 is the imposition of strict restrictions to prevent the spread of coronavirus infection.

Chinese buyers against the background of anti-cooking restrictions at home and the frenzy of demand for LNG in Europe skillfully maneuvered in the spot market, reaching the optimal price of gas supplies. After Europe filled its UGS to capacity, PRC buyers took advantage of the price drop and ramped up purchases at the end of the year.

Earlier we reported that Europe’s economy was surprisingly resilient.

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