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February 2022 witnessed aggravated tensions between Russia and Ukraine, which profoundly affected the financial markets around the world. The forex market, too, has seen significant drops. Major currencies like the US dollar, Euro and Russian currency Ruble have been the most impacted.
Let’s take an in-depth look into the impact on the forex market due to the Russia-Ukraine crisis.
How has the crisis affected major forex currencies pairs?
1. US Dollar
The USD has witnessed its all-time high in the last two years since the start of the Russia-Ukraine crisis took place. The increase has taken place due to most forex investors increasing their demand for the currency as a safe haven asset. The USD index rose by around 0.9% and witnessed its highest daily percentage gain after March 2020. After the new sanctions against Russia were announced, the USD dropped a little but still remained at an overall high.
1. Pair trading
The pair trading strategy enables traders to take two opposing positions in different but correlated financial products, like two different currency pairs. Pair trading helps traders potentially benefit in both rising and falling markets by taking advantage of the divergence in the two assets, which in our case are currency pairs.
The trader chooses a weak currency pair and a strong currency pair in the market and opens a long position in one and a short position in the other. By doing this, the trader expands their opportunities to take advantage of the market trend irrespective of which direction it goes.
2. Euro
Hedging is a type of risk management strategy that focuses on offsetting losses in CFD trading by opening opposite positions in the same asset. It protects traders from the adverse effects of short-term price volatility and changes in the market due to some particular financial news or event.
For example, suppose you are trading USD/EUR and have opened a long position in the same, and a financial crisis in the US depreciates the value of the USD. In this case, the hedging strategy will help you open a short position in USD/EUR to benefit from the falling USD prices and offset any losses incurred from the long position in the same currency pair.
3. Russian Ruble
The Russian currency, RUB, has recorded a fresh low ever since the crisis and weakened by around 4.5%. When compared with USD, the currency has dropped approximately 29% since the last week of February. The primary reason behind the exchange rate depreciation is economic sanctions that put restrictions on Russian companies from rolling over their debt. It limits the companies from exchanging their currency for other foreign currencies to meet their principal and interest payment obligations.
4. Japanese Yen
The JPY is also being considered as a safe haven asset amidst the Russia-Ukraine crisis as more and more investors have been eyeing the currency. This is because the Japanese economy is unaffected by the crisis as neither Russia nor Ukraine come under the major trading partners of Japan. It has witnessed its three-week high in the last week of February and is trading around 0.2$ higher when compared to the USD at $114.50.
5. Swiss Franc
The CHF has reached its two-week high since the crisis outbreak as investors are considering this currency pair as a safe haven, as well. This is because the trade relations between Switzerland and Russia are not that strong, so the crisis is not expected to impact the currency negatively.
Both Russia and Ukraine are one of the most minor trading partners of Switzerland. As Switzerland mainly trades with countries in the EU and Asia, the currency is witnessing a positive outlook of late.
How is the Russian forex sell-off going to impact the global markets?
Liquidity across Russian banks have increased as Russia has started selling off their foreign currency in the forex market after RUB hit an all-time low around mid-February. Its central bank doubled the dollar offers to $5 billion under the forex swap operations and provided $10 billion Rubles to protect the 300 Russian lenders against their payment obligations. This led to a massive increase in the US dollar prices in the forex market.
However, the country is still holding approximately $300 billion in foreign currency, and if this amount is frozen due to sanctions or moved across countries, it could definitely affect the money market gravely.
How is the Euro planning to recover amidst the crisis?
The European Union has imposed severe economic sanctions on Russia and has also forced restrictive measures against the nation with an expectation to drive the currency back up in the forex markets. Here are a few actions that the EU has already taken to foster Euro’s recovery amidst the crisis –
- Sanctions imposed on state-owned outlets in Russia
- SWIFT ban introduction for seven Russian banks
- Ban on transactions with Russia’s central bank
- Support package worth 500 million sent to Ukraine to indicate reassurance and support to the country in distress, leading to positive market sentiment for the currency
- Goods import ban from Russia
- Trade and investment restrictions with respect to infrastructure and economic activities in Russia
- An imposition of an export ban to Russia on some technologies and goods
Crisis impacts on energy prices and supply chain management
Russia is one of the biggest oil and natural gas producers and exporters. The escalating tensions with Ukraine have led to an uncertain energy crisis due to the restriction in transporting gas via the Ukraine channel. The less supply and rising demand drove the European natural gas benchmark to its highest price level ever, at 180 euros per megawatt-hour in late December and early January, leading to the Ruble depreciating.
The world crude price has also increased ever since the Russia-Ukraine crisis escalated and stood at one of its highest price levels at $120. The energy prices are expected to increase further due to the continued problem.
The pandemic already worsened the supply chain management due to pressure on shipping routes, and the situation is going to aggravate due to the crisis even further. All logistics costs, including shipping costs, freight rates, taxes if applicable and container costs, have started soaring and are in for a more significant downtrend.
This will hurt exporters and importers across the world, especially the ones in the micro, small and medium enterprise industry. Another reason for the logistics costs shooting up and causing supply chain issues is that Asian exporters will now be avoiding the Black Sea Ports in Odessa, Yuzhny and Ilyichevsk in Ukraine, which were the paths most commonly used to ship commodities to the 12 states that come under the Commonwealth of Independent States.
The forex market is safe
The future, though uncertain, does not indicate a forex market crash as the markets and currencies have started to recover already.
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