Russia-Ukraine War Effect On The Forex Market

A worldwide outcry has been caused by Russia’s recognition of the DLPR, which has triggered the first batch of sanctions. Russia’s domestic markets are closed for a national holiday, but offshore trade reveals that Russian USD debt continues to fall. A look at how other markets have reacted to Ukraine’s recent events

Russia has recognized the Donetsk and Lugansk People’s Republics (DLPR) as independent states in eastern Ukraine and inked agreements on social, economic, and military cooperation with them. In the event of an “external military danger,” Russia’s military may invade certain countries and take action. Russia has expressed optimism for a diplomatic settlement to the conflict in Ukraine’s eastern provinces of Donetsk and Luhansk. According to OSCE assessments, there have been several ceasefire breaches along the DLPR and Ukraine-controlled borders, although actual military engagement between the Russian and Ukrainian troops has not yet occurred.

With the exception of a few nations (Cuba, Nicaragua, Syria, and Venezuela), the worldwide reaction to DLPR was overwhelmingly unfavorable. The Nord Stream 2 gas pipeline project was put on hold until further notice, foreign participation in Russian sovereign debt issued after March 1 was prohibited, and Russia’s two largest banks, Vnesheconombank (VEB) and Promsvyazbank, were hit with asset freezes and FX transaction cuts as a result of the sanctions. President Biden, on the other hand, made it clear that the steps revealed thus far are just the first step in a much larger process.

Congress is considering a bill that would allow the US government to suspend sanctions on up to 12 Russian financial entities in the event of additional escalation. Nine out of the 12 institutions on the list, according to our calculations, account for 70% of the FX balance sheet of Russian banks, while the individual size ranges from $1bn to $100bn. The FX balance sheets of the other three companies (including VEB and PSB) are not publicly available, although they are unlikely to be substantial.

Russia, Sanctions, And Forex Market

FX markets seem to be pricing in more favorable results. Volatility in the FX options market decreased as a result of President Putin’s designation of new independent regions and Russian military incursions into the Donbas area. There has been a 6% drop in one-month volatility pricing for both the EUR/USD and the USD/JPY during the previous 36 hours. The FX market can only presume that the Russian intervention will be limited to this level. It is also worth mentioning, some of the experts predict that the forex trading taxes will increase for Russian investors who trade with Russia-based fx brokers, because of the current and the growing inflation rate. For obvious reasons, the relative performance of the foreign exchange market has been influenced by the closeness of countries and the reliance on energy imports (although the Japanese yen has outperformed here.)

Traded interest rates’ response to the present crisis has been mild when compared to the spike they’ve experienced since last summer. For example, 10-year Treasury rates, a safe-haven asset for many, are just 7.5 basis points below their top. Perhaps market players are too optimistic about how recently escalated tensions will affect the performance of risk assets and the economy as a whole.

The Russian rouble was initially unfazed by the new sanctions, but it is still vulnerable. The question of whether Russian FX swap curves begin to take counterparty risk into account will be a key one for the FX market. FX swaps for a currency that can be delivered should only have one FX swap curve. There is just a little difference in the estimated yields of one-month offshore RUB contracts at 13.6% against onshore contracts at 13.2% right now. This might extend much further if there are concerns about additional penalties.

Impact On The Financial Markets

Fears of an oil supply interruption due to the conflict in Ukraine sent crude prices surging over $100 a barrel for the first time since 2014, with Brent reaching $105. On Thursday, oil prices in the United Kingdom and the Netherlands jumped by 40 to 50 percent. Even though oil and gas prices dropped on Friday, investors’ nerves are still jangling.

Some of Russia’s largest oil customers had difficulty securing bank guarantees or finding ships to transport their petroleum from Russia in spite of Western sanctions on the country.

As the second-biggest oil producer in the world, Russia supplies Europe with around 35 percent of its natural gas and 50 percent of German gas needs.

Inflation-linked bonds – securities whose dividends grow in step with inflation – fueled a rush for the bonds.

Treasury Inflation-Protected Securities yields dipped this week, but breakevens jumped to 3%. Germany’s two-year real rates fell by roughly 30 basis points as European gas costs climbed, making the country susceptible. TIPS funds had their first net inflows in five weeks, according to statistics from the Bank of America.

As investors have been nervous about substantial central bank rate rises, Thursday’s market crash reduced the value of the global stock market by roughly $1 trillion and continued a decline in the main indexes that began this year.