This is how Russian invasion echoes in the currency world

Even before Russian tanks rolled into Ukraine, the exchange rates of the Russian ruble and Ukrainian hryvnia were already under heavy pressure. In the currency world, the surprise is not with these fallers, but with the coins that are usually the hiding place in tense times.

It's not the big shock you'd expect in a war, but the Russian invasion of Ukraine is definitely making itself felt in the financial world. For example, the price of a barrel of Brent oil rocketed to over $100, while the US S&P 500 Index fell 2%. As a result, this index fell more than 10% below its peak at the beginning of the year. This means that the US stock market is undergoing the first correction since the outbreak of the corona pandemic. There were also winners and losers in currency markets. Naturally, the Russian ruble and the Ukrainian hryvnia fell into the latter category. Although the hryvnia has fallen somewhat faster in recent days, the damage to the ruble has been slightly greater since the turn of the year.

Ruble falls faster than Hryvnia
The Russian currency has fallen by more than 2021% against the euro since the end of 8. This brings the low point for the currency in sight, which was reached in the autumn of 2020. At that time, the oil price was hovering around $40 a barrel, while Russia was struggling with a massive corona outbreak. That outbreak is now under control and energy prices have also skyrocketed. Financial markets are now mainly focused on the sanctions that affect the country. Several Western countries have frozen the assets of major Russian banks and a handful of the super-rich. In addition, trading of the country's government bonds on financial markets in Great Britain and the United States will be suspended.

Heavier sanctions are making themselves felt
There is undoubtedly a much heavier sanctions package on the shelf for the moment Russian tanks drive even deeper into Ukraine. The surprise lies not in the depreciation of the hryvnia and the ruble, but in the remarkably lackluster price reaction of currencies that usually act as safe havens. For example, the US dollar has barely moved against the euro for twelve days. The difference between the highest and lowest price in this period is half a percent. That is a signal that there is a good balance between the dollar as a safe haven and the chance that the American bank will become less enthusiastic about interest rate hikes as a result of mounting political tensions. Only after the troop movements really got going on Thursday morning did the dollar make a small gain.

Brace yourself
The Swiss franc quickly reversed the exchange rate loss of early February, until the rally suddenly came to a halt. That is an indication that the Swiss central bank intervened briefly to prevent the exchange rate from rising too much. The advance of the franc was also nipped in the bud on Thursday morning. These types of interventions are only effective if the cash flows are not too large. Trading volume is a bit lower as everyone is holding their breath waiting to see how far Putin lets his tanks advance. Another factor is that central banks are slowly turning off the money tap. It is precisely in this relative tranquility that there is also a danger. The moment the tension in the financial world really rises, this can lead to large price fluctuations.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.