How the crisis in Ukraine/Russia affects the currency markets

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Article Updated: October 26, 2014

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The beginning of hostilities in Ukraine dates back to November 2013, the month in which President Yanukovych, backed by Russia and Putin, rejected an agreement for a closer integration with the European Union, triggering widespread protests in the streets.

map of crimea, ukraine & russiaThe bad moods increased during the winter, culminating in the month of February 2014 with the fall of the Ukrainian government and the escape from the country of President Yanukovych. This situation triggered the reaction of Moscow that effectively supported the pro-Russian revolts in Ukraine that led to the proclamation of the adherence to the Russian Federation by the Parliament of Crimea. Subsequently, on March 16th, the Crimean status referendum, established the first definitive tear in Russian – Western political relations. This resulted at the end of March in the exclusion of Russia from the G8.

Meanwhile, the pro-Russian were advancing in the east of the country, with Donetsk and Lugansk that voted in a referendum for the independence from Ukraine.

At the same time, on June 27th, Ukraine signed an association agreement with the European Union triggering the anger of Moscow. Just that date coincides with the greatest strength point of the Ruble in 2014 when the change started to rise quickly toward new lows against the Dollar.

From the currency point of view, many interesting dynamics have been developed since the outbreak of the Russian-Ukrainian crisis, offering investors various opportunities for profit.

Usually when financial stresses occur, the dollar tends to be an excellent safe haven, as the purchase of U.S. government bonds moves the buyer’s money on a theoretically risk-free financial asset.

trader-ukraine-crisis-smIn fact, this phenomenon was recorded from November 2013 with more and more consistent switches from most vulnerable currencies such as the emerging ones up to stronger currencies like the US dollar, the Swiss Franc or the Euro. However, the real winner was the dollar that was appreciated by more than 5% even against the Euro. In this case, the purchase of a U.S. government bond in dollars or the opening a foreign exchange account in dollars, or the opening of an account with a broker specialized in forex trading with a subsequent decision to trade long dollar against euro or ruble and other involved currencies could have been the correct choice of investment.

 

One of the reasons behind this dynamic is also linked to the fact that emerging markets such as Russia carried out bonds issues in both local currency and in dollars; investors had the chance to take advantage of these moments to move their investments from the local currency (in this case the ruble) to the hard currency such as the dollar the United States.

The war tensions that are still involving Russia and Ukraine represent a negative element also for neighbouring countries, damaged by the commercial exchange as well as the theoretical military risk of enlargement of the war front. For this reason, major international investors have preferred to sell Eastern Europe currencies such as the Czech koruna (CZK) and the Hungarian forint (HUF) whose performance were quite negative from November 2013.

When we start our forex trading, we often tend to focus on the technical analysis of price charts, but, in reality, changes are also affected by events that are not always economic. We are talking about political events or, as in this case, acts of war that frighten investors that prefer to change the local currency of the  under pressure country (in this case Ukraine and Russia) for safer investments.

The UsdRub graph clearly shows us the psychology of forex investors from the time when the tensions of war have developed. The first wave of selling rubles and buying dollars was recorded in November 2013 with the start of the crisis, while a second wave with a similar behaviour occurred from June 2014 when Ukraine made an agreement with the European Union, generating a new tear with the government of Moscow.

USD RUB graph ukraine russia crisis

Therefore, it is very important for a forex investor to consider the balance of its investment portfolio. Never be overly focused on a currency, but seek for diversification; within this diversification, higher-yielding currencies (usually the emerging ones) must then be mixed together with currencies best suited to deal with moments of tension and volatility in the financial markets (such as the US dollar or the Swiss franc).

Using this type of money management, every investor will be able to reduce the portfolio risk albeit maintaining a good return.

In the coming months, the military tensions between Ukraine and Russia might disappear or explode to offer to those who invest in the forex various investment opportunities. Through any online broker investors will be able to be timely and make even more speculative investments, taking advantage of the pessimism moments, but without forgetting the need to maintain a portion of the portfolio in risk-free assets such as gold or dollars.

 

 

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