Forex Turbulence – How is the War Impacting the Market?
by Arnab Dey Finance 24 March 2022
The Russia and Ukraine war is impacting the global markets big time. Oil prices are soaring at labels not seen in the recent past. Prices of metals and commodities are impacting the general masses. The foreign exchange markets are also not untouched and are experiencing turmoil due to ongoing catastrophes.
Current Geo-Political Conditions
The tensions between Russia and Ukraine date back to the early 1900s. The situation quickly escalated between them over Russia’s independent state recognition of Donetsk and Lugansk People’s Republics.
Russia’s continuous shelling over Ukraine has cost havoc, and most of the Ukrainian ports are in Russia’s control now.
The deterioration of the situation is receiving criticism from most nations barring a few exceptions. Many have imposed restrictions curbing foreign participation in Russia’s sovereign debt market and the ongoing international projects.
Promsvyazbank and Vnesheconombank, Russia’s two largest banks, had a significant impact due to these actions. Situations became worse as other nations froze assets and undertook forex transaction cuts.
The US Stand
The US has put forth that the steps set in action are only preliminary, and they are in talks with the NATO countries to take a call on retaliation. A bill in the US Congress is in motion barring sanctions of 12 Russian financial institutions.
Experts suggest that 70% of Russian banks’ forex balances are under the purview of 9 out of these institutions in question.
A Turbulent Past
Forex markets are volatile by nature and exhibit a considerable risk. It is not an instrument for savings, and caution is advisable to every trader.
Over the last decade, there has been a rise in foreign exchange fraud, and government agencies put forth a few guidelines to identify potential fraud:
- Fraudsters pitching to you that you can make money from current affairs of which the public is already aware
- Fishy pitches that come to you via referrals, email, or social group
- Calls that seek personal information and banking details
- Sales pitches that ensure no downward forex movement
Impact on FX Market
The recent trends in the forex markets suggest it is factoring in volatility in its favor. However, there is a significant impact of President Putin’s invasion of Ukraine.
The continuity and escalation of the war can inch towards participation by the Western countries and turn it into World War III.
Euro in a Gloomy State
The euro has shed over 3% against the dollar and fell below $ 1.10 in the second week of March. The markets have not seen these figures for almost two years, and the fall is the biggest since March 2020.
The euro traded at considerable losses vis-à-vis the Swiss franc. A decline of 4% has led to the currency’s biggest breach since January 2015. The 2015 event came into action when Switzerland scrapped the capping of the franc against the euro.
The rising tensions due to Russia’s invasion is hitting the economy. The rise in oil prices is leading to the currency’s downward trend.
Market Predictions
The foreign exchange market can only hope that the war will not escalate further. Experts believe that the forex trading taxes will increase substantially for Russian investors. Those who trade via Russia-based forex brokers will see a significant impact due to the burgeoning inflation rates.
The forex market gets influenced by the nations dealing with energy resources. However, it is worth mentioning that the Japanese yen outperforms this index.
The response of the created interest rate to this prevailing condition has been significantly low vis-à-vis the spike it saw last year.
Experts believe this is due to the high optimism among the market players about how the escalating tensions between the nations will impact the world economy. The positive outlook towards the growth of underlying assets is a major driver.
Signs of Disconnect in Rouble
The new sanctions by the foreign nations could not deter the Russian rouble initially. However, there is still a significant vulnerability looming over the currency. The future trend and the course of the Russian forex curve will be critical factors to consider.
The deliverable forex swaps for a currency can have a single one only. The 30% decline of the Russian rouble in offshore trade is the worst downfall in history.
The sign of disappearing liquidity is visible in the wide bid-ask spreads. These signs point towards Russia’s disconnection from the global forex markets after the foreign countermeasures and sanctions.
Will it be able to counter the fall and pull back investor confidence? We will have to wait to find out that answer.
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