The Effects of the Russia-Ukraine Crisis on the Forex Market by Blueberry Markets

The escalation of hostilities between Russia and Ukraine in February 2022 had a significant impact on global financial markets. The FX market has also seen large decreases. The most affected currencies have been the US dollar, the Euro, and the Russian Ruble.

Let's take a closer look at the influence of the Russia-Ukraine situation on the FX market.

What impact has the crisis had on key FX currency pairs？

The US dollar

Since the beginning of the Russia-Ukraine conflict two years ago, the USD has reached an all-time high. The gain has occurred as a result of increased demand for the currency as a haven asset by most FX investors. The USD index increased by almost 0.9 percent, marking the largest daily percentage rise since March 2020. Following the announcement of further sanctions against Russia, the USD fell slightly but stayed at an all-time high.

Trading in pairs

Pair trading allows traders to take opposite positions in two separate but linked financial items, such as two different currency pairings. Pair trading allows traders to profit in both rising and falling markets by capitalizing on the differential between two assets, in this instance currency pairs.

In the market, the trader selects a weak currency pair and a strong currency pair and initiates a long position in one and a short position in the other. By doing so, the trader increases their chances of profiting from the market trend, regardless of which way it moves.

Euro

Hedging is a risk management approach that involves establishing opposing positions in the same asset to counterbalance losses in CFD trading. It shields traders from the negative consequences of short-term price volatility and market shifts caused by specific financial news or events.

Assume you are trading USD/EUR and have established a long position in the pair, and the value of the USD falls due to a financial crisis in the United States. In this situation, the hedging technique will assist you in opening a short position in USD/EUR to gain from dropping USD prices while offsetting any losses generated from a long position in the same currency pair.

The Russian Ruble

Since the crisis, the Russian currency, the RUB, has fallen to a new low and has lost almost 4.5 percent of its value. When compared to the USD, the currency has fallen almost 29 percent since the final week of February. The fundamental cause of the currency devaluation is economic sanctions that prevent Russian enterprises from rolling over their debt. It prevents corporations from exchanging their currency for other foreign currencies to satisfy their principal and interest payments.

The Japanese Yen

The JPY is also being seen as a haven asset in the context of the Russia-Ukraine conflict, with an increasing number of investors eyeing the currency. This is because the Japanese economy is untouched by the crisis since Russia and Ukraine are not among Japan's key trade partners. It reached a three-week high in the final week of February and is now trading roughly 0.2$ higher than the USD at $114.50.

The Swiss franc

The CHF has reached its two-week high since the crisis outbreak as investors are considering this currency pair as a 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 has 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 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 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 Euros recovery amidst the crisis –

• Sanctions imposed on state-owned outlets in Russia

• SWIFT ban introduction for seven Russian banks

• Ban on transactions with Russias 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 concerning infrastructure and economic activities in Russia

• 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 Odesa, 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.