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Russia-Ukraine war has hit currencies hard. Here’s what analysts expect next


Unknown man inspects a board that displays the Russian ruble exchange rates against both the US and Euro. It is located outside of a currency office. The Russian ruble fell to new lows on March 2nd, 2022 with the US Dollar and Euro rates at 110 and 122, respectively, at Moscow Exchange.

Mikhail Metzel | TASS | Getty Images

LONDON — Currency markets have not escaped the steep losses and wild swings seen across other asset classes in recent weeks, and strategists are changing their game plans in light of Russia’s invasion of Ukraine.

The Deutsche Bank Currency Volatility IndexOn Tuesday, the European stock market climbed to 10%, the highest since April 2020 in the early stages the Covid-19 pandemic.

The euroGained 0.4% over the dollarWhile some flight to safe haven assets stabilized Tuesday, it was still more than 4 percent lower against the greenback. The war began with conflict that intensified, and then the focus shifted to European energy security. To end the longest three-day decline since March 2020, the common currency lost more than 1% Monday.

Euro slide

Note Friday Goldman SachsKamakshya and Zach Pandl, co-heads for global FX rates, EM strategy and rates, stated that the Wall Street titan’s positive outlook on the Euro was no longer possible, as long as there is military conflict.

Goldman’s models suggest that the downgrade to growth expectations across the euro zone subtracted around 1% from the EUR/USD currency pair last week, while an increase in the Europe-wide risk premium – the extra returns an investor can expect for taking on more risk – was worth almost 4%.

“Despite the sharp fall in EUR/USD, these models suggest the currency should be trading somewhat lower—around 1.07-1.08—given the moves in other market variables,” Pandl and Trivedi said.

They noted the need to be cautious when estimating, but the models indicated that the euro was relatively stable against the dollar. Polish zloty (PLN), Swedish krona (SEK), U.S. dollar (USD), Hungarian forint(HUF). British poundAlthough the (GBP) has a weaker position than other currencies, Swiss franc (CHF).

According to strategists, this means that EUR/USD or EUR/GBP would be the best crosses to create new hedges against Ukraine-related risks. However, they noted that EUR/CHF is responsive to developments in Ukraine due to its traditional status of a safe haven.

They added that the possibility of the Swiss National Bank intervening in order to stop the currency’s appreciation had “likely increased now”.

The region was shaken by the military conflict, which cast uncertainty on the macroeconomic outlook. However, Pandl and Trivedi said that while spillovers could affect the growth prospects of the euro area, they would not cause a sustained euro decline. European Central BankWhile some may be concerned about inflation’s impact, governments might respond with fiscal easing.

The pair stated, “Moreover, if Euro Area GDP remains reasonably strong and the ECB is on track to increase rates this year,”.

“For the moment, we remain on the sidelines with EUR crosses while waiting for clarity about the ongoing geopolitical crises.”

BMO Capital Markets stated that there was a smaller decline in euro than in other European currencies due partly to high liquidity at the EURUSD exchange rate.

According to BMO strategists, “The background points to less inward investments into Europe from overseas, weaker economic growth, and further deterioration of the trade balance because of the high oil price.”

We wouldn’t consider the EURUSD move to be overextended from a fundamental standpoint.

Eastern Europe and Ruble

The Russian rubleIt has dropped more than 64% against the dollar in the past year to reach an all-time low. This is a large result of the unexpected severity of Western sanctions placed on Russia, its financial system and its economy, with the aim to isolate Moscow.

According to BMO, central to last week’s decline was an effective freeze by the Central Bank of Russia on its ability to use large amounts of foreign currency reserves. The majority of these were in euros, and kept with EU banks.

Stephen Gallo and Greg Anderson, BMO’s foreign exchange chiefs, said that the favorable start point for Russia’s international position before the invasion, the absence of an immediate ban on EU imports from Russian fossil fuels and CBR’s doubled benchmark interest rate at 20% had somewhat reduced the magnitude of the USDRUB move.”

We cannot however be certain that the USDRUB screen price reflects what Russian citizens or businesses would have to fork out for USDs, if they tried to sell their RUB right now.

The Russian stock market has been shut down for at least the week. Although the international foreign currency market remains open for trading in rubles, BMO stated that sanctions had rendered the currency “highly liquid.”

The ruble has not been the only currency to plummet, as have the currencies of ex-Soviet satellite countries, including HUF, PLN and HUF. Czech korunaThe CZK fell between 8-12% in the time leading up to the invasion.

BMO stated that the volume of the movements indicates capital flight to these currencies.

Both local residents and global investors are likely to be concerned about this capital flight. Anderson and Gallo stated that liquidity in these currencies was extremely low, leaving room for volatility to continue.

According to the War on Terror, Poland is the top destination for Ukrainian evacuees. It is also a major part of the supply route network that allows goods and weapons to be transported into Ukraine. Therefore, PLN is particularly susceptible and vulnerable.