Western sanctions over Russia’s war of aggression in Ukraine have pushed the ruble to historic lows against the US dollar. The dollar, in turn, rose nearly 42 percent to a record high of 119 rubles on Monday. On Friday evening it was still around 84 rubles. In Japan, some online forex trading platforms, through which many retail investors trade currencies, are already suspending ruble-yen trading.
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Western states have banned Russian banks from the Swift system, which handles global payments. Also, assets of the Central Bank of Russia, which holds more than $600 billion in reserves, were frozen. This hinders support purchases that could stabilize the ruble exchange rate.
The Russian central bank is reacting to the currency crisis resulting from western sanctions with a drastic interest rate hike. The key interest rate will rise from 9.5 to 20 percent, as the currency watchdogs announced in Moscow on Monday. At the same time, they signaled their readiness for further increases. Central bank chief Elvira Nabiullina wants to explain the measures during the day at a press conference.
The present value of the assets of the Russian central bank consists of two components, explains Commerzbank foreign exchange expert Ulrich Leuchtmann:
- The central bank’s ability to issue currency that functions as money, and thus has value, at almost no cost.
- your foreign exchange reserves.
“With the West’s decision to freeze the foreign exchange reserves of the Russian central bank, some of the assets that represent the value of the ruble have been called into question,” explains Leuchtmann. “And with the risk that financial and foreign trade sanctions could significantly increase the purchasing power of the ruble, the other component is already scratched.”
Instead, the dollar was in demand as a “safe haven”. In return, the euro came under pressure at the start of the week. In early trading, the price fell below the $1.12 mark. It was back close to Thursday’s multi-month low, when it fell to $1.1106, its lowest level since mid-last year, following the Russian attack on Ukraine. The euro had recovered somewhat on Friday.
“Geopolitical developments are very fluid and have the potential to create high short-term volatility in financial markets,” warned Ebrahim Rahbari, currency strategist at Citigroup on Sunday. How long this so-called “risk-off” phase could last depends on political developments.
Cryptocurrencies gave way. Market leader Bitcoin was down 1.7 percent and cost $37,782. Ether, the second largest cryptocurrency, was down 3.6 percent at $2,625.
Equities: Asia mixed, Wall Street down premarket
Moscow has postponed its stock exchange launch, forex and repo trading should open at 8 a.m. Central European Time. With regard to other markets, a later opening is being examined, it said. Earlier, Russia’s central bank banned securities dealers from selling Russian securities owned by foreigners.
In Asia, stock markets have been “impressively resilient,” says Jeffrey Halley, Asia analyst at online FX broker Oanda. One reason, he sees, is that Western sanctions leave a door open for oil and gas supplies.
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The leading Japanese index Nikkei was even up at times during morning trading and finally went into the lunch break at 26,393 points and 0.3 percent below Friday’s closing price. The more broadly weighted Topix index was unchanged, while South Korea’s Kospi index was up 0.2 percent.
Markets that are more dependent on China turned negative after a slow start. The Shanghai Composite Index was down 0.1 percent, Hong Kong’s Hang Seng Index was down 0.8 percent and Singapore’s Straits Times Index was down 1 percent.
However, market participants see no turning point in the restrained reactions of the stock exchanges in Tokyo and Seoul, but only a lurking position. Hiroyuki Fukunaga, CEO of Investlast, a trust fund provider, told the Japanese newspaper Nikkei that he wants to wait and see where the talks between the warring parties lead. Talks between representatives of Russia and Ukraine are scheduled to take place on Monday morning at the Belarusian border.
In the US, markets reacted more sharply to the unprecedented sanctions against Russia’s financial system, with futures on the S&P 500 falling 2.4 percent and those on the tech exchange Nasdaq falling 2.7 percent. The German leading index Dax is also around three percent in the red before the market.
Commodity markets: “Crisis currency” gold in demand again
Because of the war in Ukraine, more and more investors are looking for protection in the “safe haven” of gold. The precious metal is heading for its biggest one-day gain in about a year, up 2.2 percent to $1,928.32 an ounce. At the same time, palladium rose in price by almost eight percent to $2551.50 a troy ounce. Russia is a major exporter of this precious metal.
The growing fear of supply disruptions drove the price of oil up again. Brent from the North Sea headed for its biggest daily gain in almost a year and a half, up 7.3 percent to $105.07 a barrel. Prices came under some pressure on Friday on vague hopes of talks between Russia and Ukraine.
The war “is likely to push energy prices up significantly, leading to immediate inflationary effects and slowing the global economy,” wrote Silvia Dall’Angelo, economist at asset manager Federated Hermes. That increases the risk “that the central banks will make mistakes.”
Bonds: between haven and inflation worries
Investors also grabbed government bonds; they are considered a place of refuge. The smaller declines in longer-term yields underscored fears that Western sanctions could fuel inflation: the US two-year yield fell nine basis points to 1.48 percent, the 10-year yield fell seven basis points and the 30-year yield fell five basis points.
However, traders are sticking to their bets that the US Federal Reserve will raise interest rates at least five times this year. This raises concerns that the crisis in Eastern Europe will cement the return of stagflation. In stagflation, weak economic growth goes hand in hand with rising prices.
“This Russian shock could not have come at a worse time,” said Rob Subbaraman, head of global market research at Nomura Holdings Inc most other G10 central banks.”
With agency material
More: It would be an unprecedented step: The governments in the USA and Europe want to freeze the international reserves of the Russian central bank – with drastic consequences for the economy.