Markets jolted by news of Russian invasion of Ukraine

( 3 min )

Financial markets were left reeling on Thursday morning on the 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 in the past couple of weeks, as Russian troops amassed on the Ukrainian border and authorities in the US and UK warned that an attack was imminent. Investors had appeared fairly optimistic that a peaceful solution could be reached that would avoid bloodshed, although that optimism was quashed after Russian President Vladimir Putin announced a ‘special military operation’ in a TV statement this morning. Military vehicles crossed the border in the north, south and east of Ukraine soon after, with a number of casualties so far reported and Ukrainian President Volodymyr Zelensky announcing that marital law is now being enforced across the country.

Unsurprisingly, we’re seeing clear risk off in FX in response to this morning’s news. The sell-off in risk assets has been led by the Russian rouble itself, which was down more than 8% at one stage to a fresh record low, although it has since recouped some of these losses. Most major currencies in the CEE region have followed suit, down more than one percent on the dollar for the day, with most other emerging market currencies also losing ground. Moves among the major currencies have so far been largely contained, although we have still witnessed sell-off in excess of half a percent in the higher risk ones, notably the Norwegian krone and Australian and New Zealand dollars. The euro and sterling are also down approximately half a percent, while the safe-haven US dollar and Japanese yen have both outperformed, as one would expect during periods of uncertainty.

Figure 1: USD/RUB (23/02/2022 – 24/02/2022)

Leaders around the world have responded by threatening tougher action on Russia. The EU is said to be preparing ‘massive sanctions’ on the country, with the US and UK among others almost certain to follow suit. This had led to a sharp move higher in oil prices, which are now at fresh 8-year highs above $103 a barrel. The impact on monetary policy in the long-term is less clear. While we see the developments as inflationary, the uncertainty created has caused markets to dial back on expectations for hikes, with futures now pricing in a mere 20% chance of a 50 basis point hike from the Fed in March, and only an 80% chance of a 25 basis point one.

While moves in the majors have so far been largely contained, the path of least resistance for higher-risk currencies is lower as developments in Ukraine unfold. Unfortunately, the situation looks likely to deteriorate before it gets better, and the sell-off in risk appears to have more room to run in the near-term. Investors will be paying very close attention to the latest developments as they hit the newswires, and we expect markets to remain highly sensitive to incoming newsflow. If it wasn’t already the case before, news out of Ukraine will undoubtedly be the main driver of currencies for at least a little while yet.

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