Financial markets were reeling Thursday morning on news that Russia had launched a full-scale military assault on Ukraine, with reports of missile strikes and explosions in major cities.
he threat of invasion has loomed over markets over the past two weeks as Russian troops massed on the Ukrainian border and US and UK authorities warned an attack was imminent. Investors seemed quite optimistic that a peaceful solution could be found that would avoid bloodshed, although this optimism was dashed after the Russian president Vladimir Poutine announced a ‘special military operation » in a televised statement this morning. Military vehicles crossed the border into northern, southern and eastern Ukraine soon after, with a number of casualties reported so far and the Ukrainian president Volodymyr Zelensky announcing that the law on marriage is now applied throughout the country.
Unsurprisingly, we find eliminate risk in FX in response to the news this morning. The massive sale of risky assets was led by the Russian ruble himself, who was down more than 8% at one point to a new record low, although it has since recovered some of those losses. Most major currencies in the CEE region followed suit, down more than one percent against the dollar for the day, with most other emerging market currencies also losing ground. Move among the main currencies have so far been widely contents, although we still saw sales of more than 0.5% on the riskiest stocks, notably the Norwegian krone and the Australian and New Zealand dollars. the the euro and the pound sterling are also down about half a percent, while the refuge Both the US dollar and the Japanese yen outperformed, as you would expect in times of uncertainty.
Chart 1: USD/RUB (23/02/2022 – 24/02/2022)
Leaders around the world have responded by threatening to take tougher action against Russia. The EU is getting ready “massive penalties” on the country, with the United States and the United Kingdom among others almost certain to follow suit. This led to a sudden move higher oil prices, which are now at new 8-year highs above $103 per barrel. The impact on long-term monetary policy is less clear. Although we view the developments as inflationary, the uncertainty created has caused markets to backtrack on expectations of hikes, with futures now pricing just a mere 20% chance of a 50 basis point rise. related to fed in March, and only an 80% chance of getting a 25 basis point one.
While movements in major currencies have so far been largely contained, the path of least resistance for high-risk currencies is weaker as developments in Ukraine unfold. Unfortunately, the situation is likely to get worse before it gets better, and the sale at risk seems to have more leeway in the short term. Investors will be paying close attention to the latest developments as they hit the newswires, and we expect markets to remain highly sensitive to incoming news. If it wasn’t already the case before, news out of Ukraine will no doubt be the main currency driver for at least some time to come.
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