OPTIONS: Larger FX Option Pipeline

• EUR/USD: $1.1370(E505mln)
• USD/JPY: Y140.00($1.8bln), Y145.00($1.4bln)

Treasury Secretary Bessent in Q&A says that there is an "incredible opportunity" to make a deal with China that will benefit both them and the US, citing the example of Japan's reforms over a decade ago and the subsequent Japanese economic performance.

• On communicating with Beijing that they have to address "imbalances": "I think that our Chinese counterparts will come to this realization ... sometimes it takes an external push, right?... there is an opportunity for a big deal here that the US is looking to rebalance to more manufacturing. The identity of that would be less consumption. If China is serious on less dependence on export led manufacturing growth and a rebalancing toward a domestic economy - I think they use the term dual circulation. Well, right now, it's really singular circulation. And if they want to rebalance, let's do it together. This is an incredible opportunity."
• Bessent repeats that the US maintains its "strong dollar policy", and suggests that being the reserve currency has its "pressures", noting that while : "I think that the US will always, for my lifetime, be the reserve currency. I'm not sure that anyone else wants it. I can't remember. One of the European officials said today, maybe it was Mr. De Guindos, I can't remember, said, oh, well, the Euro could become a second reserve currency. Well, we just had a substantial appreciation in the euro for export economies. It's a lot of pressure."
• On European rebalancing via higher defense / German fiscal spending : "It's a combination of economic stimulus, and it is a combination of burden sharing on the European continent for defense. And as I said many times before, economic security is national security, national security is economic security. So if this European plan works, that I applaud it."
• Bessent also reiterates that a reduction in the US fiscal deficit is part of a rebalancing: "A trade deficit emanates from three things: external trade policies, which we are intent on addressing, and the external trade policies can be tariffs, non tariff barriers, currency manipulation and the subsidy of state, subsidy of labor and means of production - so trade, terms of trade, or trade regulation, is one. Two is our budget deficit. So the larger our deficit, the more the it creates a demand suck, also pushes up interest rates, and then three, the level of the dollar. We continue to have a strong dollar policy, and the dollar will adjust based on markets. Everyone asked me, well, what does a strong dollar mean? And to me, the strong dollar means having the policies in place to the deserve capital flows and have confidence. But it doesn't mean that the price on the Bloomberg screen every day, and it also has different meanings in terms of bilateral prices. ... I have talked about we did not get here quickly with the spending. The US does not have a revenue problem. We have a spending problem."

While the US tariff uncertainty remains a key short-term driver of the gold price, medium/long-term drivers remain its use as a monetary inflation hedge in investment portfolios, a vehicle to build up/diversify central bank reserves and jewellery demand. See below for a summary of recent trends in these three key demand sources, using data from the World Gold Council (WGC): 

• WGC data highlights a sharp increase in gold ETF flows since December 2024, most notably in February (100 tonnes) and March (92 tonnes). In the three weeks to April 18, we estimate an additional 108 tonnes of inflows as US reciprocal tariff volatility moved in focus.
• Central bank gold purchases increased slightly in January (20 tonnes) and February (24 tonnes), up from 13 tonnes in December. The PBOC has been in focus after restarting gold purchases in November, with 28 tonnes of gold acquired over the last five months. However, we note that between November and February, the National Bank of Poland also purchased 53 tonnes of gold.
• Jewellery accounted for 40% of total gold demand as of Q4 2024, spearheaded by the likes of India and China. However, there is evidence of demand destruction as a result of recent price rises, with total jewellery demand down 11% Y/Y in Q4 (and demand from Mainland China seeing a notable 28% Y/Y fall). In India, WGC wrote on April 17 that “Gold's steep climb and ongoing volatility are keeping many consumers on the sidelines, with demand for jewellery continuing to be limited to need based purchases, particularly for weddings“.