FX Compass: On the Waterfront – An update about the Ports of Los Angeles and Long Beach
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On the Waterfront – An update about the Ports of Los Angeles and Long Beach
This week I am joined by Stephen Cheung, who is the chief operating officer of the Los Angeles Economic Development Corporation (LAEDC) and the president of World Trade Center Los Angeles (WTCLA). Stephen has had many roles in international trade in the Los Angeles area, including key posts within the administration of LA Mayor Eric Garcetti. In this discussion, we touch on several key points related to the ports:
How does the current heavy volume of shipping, and the problems that come with it, ripple through the LA area and into the broader state and national economy?
What are the ripple effects (pun intended) of the recent logjam in the Suez canal with the “Ever Given” being stuck for six days, literally between continents — with one side being in Africa and the other in Asia?
How do the ports of LA and Long Beach compare in the context of growing world trade?
Before we talk with Stephen though, Julia Allegretto and I discuss the charts below and the story they tell.
One- to two-week view: The euro outlook remains bearish as the EU, unlike the U.S. or U.K., seems to be more severely affected by the third COVID-19 wave (France announced new nationwide restrictions) with vaccination progress also slower than seen in the U.S. and U.K. Moreover, the ECB has differentiated itself from the Fed by pushing back against rising yield by announcing a faster pace of PEPP purchases. Finally, growth expectations in the eurozone remain below those in the U.S. Overall, vaccine distribution, COVID-19 trends, and fiscal and monetary policy differences support the expectation that growth rates in Europe will lag growth rates in the U.S. The euro area unemployment rate will be reported this week and is expect to remain at 8.1%.
Three- to six-month view: Heading into the year, we questioned the euro’s ability to continue strengthening, as many factors (valuation, yield compression, removal of sovereign risk) have faded. If anything, aggressive fiscal stimulus in the U.S. only adds to euro pressure, as it sharpens the difference in U.S. and European growth. Notably the U.S. lost less output than the euro area through the pandemic, and the U.S. fiscal response has also been stronger. Case in point — the U.S. is sending out stimulus checks worth 2% of gross domestic product (GDP), while Europe is contending with slower vaccinations and constant pushbacks on when economies will reopen. Finally, on monetary policy, the ECB has committed to a significant increase in PEPP purchases and has understandably shown more concern for financial conditions than the Fed, leading to policy divergence that should pressure the euro.
One- to two-week view: Good vaccine progress, an overall improvement on the COVID-19 situation, a larger-than-expected fiscal package and positive economic data all bring upside risk to pound forecasts. Given this, relative vaccine outperformance has largely been priced in and the Bank of England (BoE) struck a more cautious tone at its last meeting on the economic outlook that reflects elevated economic uncertainty. On the data front, the U.K. printed one of the strongest manufacturing PMIs in recent memory last week. Lastly, the relationship between the U.K. and EU remains in flux. While both sides have issued constructive comments, strains remain over vaccine exports, although this impacts the EU more than the U.K. given the U.K.’s inoculation outperformance. Overall the pound is expected to hold steady.
Three- to six-month view: The building block for the pound’s outperformance remains the same as it has been all year. The U.K.’s effective vaccine rollout program gives the country a good head start relative to other developed market countries in reaching the herd immunity needed for a sustained relaxation of lockdown measures. Additionally, the recent budget delivered a surprisingly large increase in fiscal support that turned fiscal measures from a headwind to a tailwind. Given this, there are reasons to remain cautious. The first reason is that the economy isn’t moving ahead of its peers but simply catching up to them. The second is that while vaccines help relative near-term economic outperformance, they won’t impact the sustained trend rate of growth that is more relevant to the medium-term outlook. Recent economic data made clear how disruptive Brexit has been to trade. While levels should recover as business gets adjusted to the rules, the point is that Brexit will have a negative effect. So while the U.K. economy is fast out of the gates, questions remain about its stamina.
One- to two-week view: USD/JPY should remain under upward pressure. With yen buying due to repatriation for fiscal yearend behind us, the yen is more exposed to weakening should U.S. dollar strength persist as expected. As such, USD/JPY likely ranges trades with a bias for weaker as it remains driven by the reflationary narrative that leads to overseas yields coming under increasing upward pressure while Japanese yields remain suppressed by yield curve control, although the widened band does allow for bigger rise.
Three- to six-month view: The sharp rise in yields during the back half of February through the first half of March necessitates a lift up of yen target rates. While the yen will be influenced by the direction of nominal rates in the near term, the medium-term outlook remains downward sloping, with moderate yen outperformance versus the dollar still expected. This view reflects Japan’s underlying balance-of-payment strength, relatively cheap valuation and real rate advantage. The trend of Japanese portfolio flows will also be important, as the good part of the yen’s cheap valuation came from unhedged outflows over the past couple of years. Rising crude prices should also weigh on Japan’s trade balance, but the current account is still expected to remain in a comfortable surplus. Given this, a delayed reopening will likely erode Japan’s trade surplus and weigh on the currency.
One- to two-week view: Overall, the view remains constructive as the Canadian economy continues to perform (GDP last week beat expectations), leading the Bank of Canada (BoC) to signal that it will be the first G-7 central bank to start tapering assets should the economy continue on its current trajectory. As such, incoming data, such as this week’s employment report, will be important to monitor as the BoC will want to see evidence of a sustained recovery. Given this, new lockdowns in Ontario, Canada’s most populous province, raise questions around the BoC’s ability to adjust policy near term and highlights Canada’s relative vaccine rollout underperformance. Thus far the Canadian economy has proven resilient to lockdowns as data has outperformed the bank’s Q1 projections despite lockdown measures, putting the BoC on a path to tapering. With reports indicating the current lockdown will be shorter and less strict than the one in December, the economic impact should be less meaningful. Nevertheless, the BoC’s April meeting comes in the middle of the new lockdown. Ultimately lockdowns shouldn’t affect medium-term tapering plans but could alter near-term timing and thus be a headwind against the recent run of Canadian dollar (CAD) strength.
Three- to six-month view: The CAD outlook remains bullish due to continued Canadian growth surprises, with an incoming wave of U.S. fiscal stimulus, the rising likelihood of BoC tapering and commodity sector outperformance that supports Canada’s terms of trade. In essence, the CAD offers both U.S. dollar–proxy qualities and pro-cyclical exposure. With economic data outperforming BoC projections, the bank will likely have to address tapering at its April meeting. Regarding U.S. stimulus, the unique composition of fiscal support could cloud how much the Canadian export sector benefits, but it will receive a boost. Moreover, the correlation between U.S. and Canadian rates illustrates the economic links between the two countries as well as similar central bank reactions to rising yields. The OPEC+ decision to hold production flat also benefits the CAD. On the negative side, Canada’s inability to manufacture vaccines domestically means it is lagging peers on deployment, making it vulnerable to a slower reopening and a more dovish BoC.
One- to two-week view: Relative economic performance (PMI stronger than expected, growth forecast upgraded by the International Monetary Fund), a current account surplus and relatively high yields still form the base for a constructive Chinese yuan (CNY) view, although this has become more balanced. Rising U.S. rates and growing U.S. exceptionalism have shifted the balance of major rate differentials toward U.S. dollar strength, which argues against further CNY strength. To be clear, this reflects U.S. dollar strength and not CNY weakness as Chinese rates still support the yuan. On the geopolitical front, U.S./U.S. allies’ tensions with China are set to increase but are unlikely lead to disruptive actions. The U.S. has indicated that Trump-era tariffs will remain in place for now, and China continues to escalate policy sanctions against American and Canadian individuals in retaliation for accusation of human-rights violations in Xinjiang.
Three- to six-month view: The CNY has proven to be less sensitive to rising U.S. yields relative to developed market currencies. This result is in line with historical data that shows interest rate differentials as not a significant driver of USD/CNY due to central bank oversight and tight capital controls that negate the effect of interest rate differentials. However, the significant rise in U.S. yields cannot be entirely ignored. China’s export sector continues to outperform and should benefit from the continued global recovery and associated increase in demand for goods. On the capital front, continued interest in reallocation of funds into Chinese bonds from global fixed-income investors should mean durable bond inflows, even amid a global bear market for bonds. Overall, the CNY still enjoys a constructive medium-term backdrop, but further gains will be hard to come by due to a more constructive U.S. dollar outlook.
One- to two-week view: The Reserve Bank of Australia (RBA) continues to maintain a dovish slant. To this point, RBA Governor Philip Lowe has reestablished RBA as one of the few G-10 central banks that have taken action against a rise in yield. The bank holds its next meeting on April 6, and Friday brings the bank’s semiannual Financial Stability Review. Expect the Australian dollar to come under pressure should the bank shift its target bond and/or open the door to more QE. Overall, the RBA’s asset purchase program and expectations for U.S. exceptionalism are making it difficult for the Aussie to do well. Australia-China tensions are also a factor, with China’s Commerce Ministry saying it will impose anti-dumping measures on some Australian wine imports for five years.
Three- to six-month view: Idiosyncratic issues, such as a negative AUD/USD rate spread and a central bank that is actively pushing against rising yields, should see the Australian dollar drift lower over the medium term. Iron ore accounts for a significant portion of Australia’s exports. Thus far, iron ore prices have been a support, but pressure on Chinese steel margins should see a drop in production demand. On the yield front, U.S. yields are around the point at which the relationship between the U.S. dollar and yields turns positive, meaning any further rise in yields should be dollar positive. Speaking of yields, the central bank knows that reflationary spillovers like higher rates and unwarranted currency appreciation can disrupt the recovery. As such, the RBA has proven itself to be one of the few central banks willing to push back on rising rates. Not only has the bank increased its asset purchase program, but it has shown a willingness to target purchases toward the most relevant part of the yield curve.
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