Rouble collapses as Russia continues invasion of Ukraine

Rouble collapses as Russia continues its invasion of Ukraine

The euro pared some of its earlier losses during Monday’s session, mirroring the Russian rouble. The latter also trimmed some of its declines from an all-time low after Russia announced that it had started talks with Ukraine.

On Monday, Russia’s foreign ministry stated that talks between Ukraine and Russia had begun; shortly before, the Ukrainian side also said the same. After Russia launched an invasion of Ukraine on Thursday, the rouble plunged by 30% to 120 per dollar. Since then, the currency has recovered some ground. But it still traded down 20%, changing hands at 102 per greenback at last.

Meanwhile, the euro, which dropped around 1% in early London trading, exchanged hands 0.7% lower against the dollar at $1.1194 on Monday. The currency also pared some of its declines against the Japanese yen, trading 0.6% lower at 129.4 yen per euro.

Neil Jones, the head of FX Sales at Mizuho Bank, noted that the common currency is holding on well this morning, all said and done, based on some rebound in the rouble. The forex market is turning its attention to Russia/Ukraine negotiations.

The euro remained 1% lower against the Swiss franc at 1.0328 today. The safe-haven currencies have been in demand after Western nations imposed strict new sanctions on Russia for its invasion of Ukraine.

Western allies have increased their efforts to punish Russia with new sanctions, including cutting some of its banks off the SWIFT financial network. They also limited Moscow’s ability to deploy its $630 billion foreign reserves and shuttered their airspace to Russian aircraft. Various companies also reported divestment plans.

 

Russia is threatening with its nuclear weapons 

 

Russian President Vladimir Putin put Russia’s “deterrence forces” on high alert. As these forces wield nuclear weapons, the president’s decision increased tensions on the market. Analysts said that those measures are expected to pulverize the country’s economy, as well as prevent the Central Bank of Russia from using its foreign reserves for outright FX interventions.

On Monday, Russia’s central bank sharply raised its key policy rate to 20% from 9.5%. The day before, it also announced a slew of measures to support domestic markets. However, that measures did little to support the rouble.

Meanwhile, a dollar rally eased, with the currency declining by 0.17% to 96.986 against a basket of peers. Across currency markets, volatility has soared, with one commonly followed measure skyrocketing to its highest since December 2020.

Other European currencies also pared some of their earlier losses against the greenback. The Swedish crown plummeted down by 0.9% to 9.4820 crowns after hitting 9.6140. At the same time, Norway’s crown tumbled down by 0.6% to 8.8915 crowns after touching 9.0200.

According to CME’s Fedwatch tool, forex markets are currently pricing in a 90% chance the Fed will hike interest rates by 25 basis points at its March meeting. The invasion put an end to speculation that the agency would jump in with a 50-bps hike. Traders also scaled back their bets for The ECB rate hikes in 2022.

 

How did the EM currencies fare? 

 

Most emerging market currencies in central and eastern Europe tumbled down against the euro, with Poland’s zloty, Hungary’s forint, and the Czech crown dropping between 1% and 1.2%.

Gabriel Sterne, the head of strategy services and global EM research at Oxford Economics, noted that there would be a lot of concern in European emerging markets and others close to the crisis, both through geopolitical links and trading. However, asset markets will likely settle down rather quickly.

Still, the escalating Russia-Ukraine military crisis has prompted investors to shift money away from riskier emerging markets and into safer assets such as the greenback and gold.

According to reports, Russian authorities also ordered brokers to stop executing orders by foreign legal entities and individuals to sell Russian securities. Analysts said that could temper the exodus of foreign money. The Central Bank of Russia’s efforts to restrict the rouble’s plunge, including raising its key policy rate to 20% and ordering firms to sell 80% of their foreign currency revenues, thus far had limited effect.

In other emerging markets, South Africa’s rand decreased by 2.1%, and Mexico’s peso dropped by 1.0%. Risk-off appetite towards emerging market assets hurt the currencies, while oil prices jumped on supply fears.

 

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