Headlines have been covering the recent string of attacks on ships in the Red Sea, comparing it to the recent Suez crisis which saw global shipping disrupted. The markets had a significant reaction back then, which highlights the potential impact for traders. As the situation isn’t expected to be resolved soon, it’s prudent to consider what the shipping crisis in the Red Sea could do to the currency markets.
The first thought is that snaring up shipping would have an impact on supply chains. That could both slow economic activity and raise retail prices, in a smaller version of what happened during the start of the covid pandemic. With a few major economies teetering on recession, it might not take all that much of a push to create a broader impact on the global economy and therefore currency trades.
The Issue by the Numbers
About 30% of global container trade goes through the Red Sea, as it is the shortest sea route from China to Europe. Around 8% of container traffic to the US’ East Coast also transits this lane. Europe, therefore, is by far the economy most likely to be impacted, as it also receives a substantial amount of its energy through this route, such as LNG from Qatar and Australia.
The alternative is to ship around Cape Good Hope, at the southern end of Africa. This route adds around 12 more days to shipping time, which can have varying degrees of impact depending on the origin of the cargo. For a ship starting in Singapore, the average time to Europe is around 37 days through the Red Sea. Around Africa, that jumps to 49 days.
Rising costs
But energy cargo sees a much more dramatic impact: The average shipping time from Saudi crude export terminals to Rotterdam is 17 days. That almost doubles 31 days if the ship has to go around the Cape. The price of transportation is measured in distance traveled, meaning that shipping costs for energy to Europe from the Middle East could almost double if the current crisis is maintained.
Houthi rebels in Yemen say they are targeting Jewish-owned ships in support of Palestinians, as a form of protest against Israeli actions in Gaza. How to determine whether a ship is “Jewish-owned” is up to the rebels, which has generated considerable uncertainty as to what ships could be attacked. The US has set up a taskforce of vessels in the region intending to protect shipping. American warships have shot down dozens of missiles and drones, with UK and French vessels also contributing. But the lack of interest on behalf of other nations has generated condemnation from American officials. And shipping companies don’t seem to be sufficiently trusting, with BP announcing a pause in shipments through the region the very day after the US-led task force was announced.
Where Things Could be Going
With little sign that the conflict in Gaza will be over soon, the threat to shipping in the Red Sea could extend for quite some time. Unlike when the Evergiven ran aground in the Suez Canal, there isn’t a specific mechanism to restore full transport capacity. The blockage isn’t total; some companies might be willing to risk transiting the Straights.
For forex traders, the concern is likely to be around cost increases for goods and services, particularly for the Euro Area and the UK. Both are in the final stages of battling inflation, and this could extend the need for tighter monetary policy. Higher energy costs could also slow economic growth. On the other hand, it could encourage more energy buying from the US, which recently high an all-time high in petroleum production. The Euro and pound could be under pressure, with the dollar getting support as a result of the Red Sea Crisis.
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