Destabilizing speculation

Currencies tumble as Russia sanctions global markets ripple

February 27, 2022

(Bloomberg) – Emerging market currencies tumbled and Australian bonds soared as global markets opened in Asia on Monday, in some of the first signs of mounting financial fallout from Russia’s assault on the EU. Ukraine and the Western response with sanctions.

The Russian ruble will be the center of attention, along with potential safe-haven currencies such as the US dollar, which rose against the euro and risk sentiment proxies such as the Australian dollar. The South African and Turkish currencies tumbled early on Monday as emerging market currencies face contagion issues. Australian 10-year bond yields fell five basis points to 2.18%.

Hard-currency bonds from Russia and Ukraine will be watched closely after credit rating cuts by major raters on Friday night, as will a swath of global markets ranging from oil and wheat to Treasuries and bank stocks.

“Safe havens are likely to remain bids in the current environment,” said Geoffrey Yu, senior strategist for EMEA markets at BNY Mellon. “In currencies, we note that over the past week the yen and Swiss franc have not materially outperformed, so we will only focus on dollar demand for now.”

The United States and its European allies stepped up their response to the escalating conflict as Vladimir Putin ordered Russia’s continued military advance, announcing plans to sanction Moscow’s central bank and cut various Russian lenders from the critical SWIFT financial messaging system. This is in addition to previous actions against the country’s largest banks and restrictions on the country’s bonds.

The euro fell more than 1% against the dollar, while the Australian dollar lost 0.6%. The traditional safe-haven Japanese yen rose against the greenback, while Norway’s currency fell as the country began the process of excising Russian assets from its sovereign wealth fund. The South African rand fell more than 2% to 15.5092 to the dollar, while the Turkish lira fell more than 1.5%.

Speculation mounted that the Russian currency could suffer another hammering in global institutional markets as Russians rushed to get their hands on greenbacks and BP Plc decided to dump its shares in oil giant Rosneft PJSC.

“We expect Russian bonds and the currency to continue falling,” said Kathy Jones, fixed income strategist at Charles Schwab. “We also expect pressure on the euro due to economic damage that could come from rising energy costs and the potential decline in business activity and consumer confidence.”

Lenders in Russia offered dollar-ruble exchange rates well above the 83 level, where the market closed on Friday. Rates varied widely on Sunday, from 98.08 rubles to the dollar at Alfa Bank to 99.49 at Sberbank PJSC, 105 at VTB Group and 115 at Otkritie Bank at 3:30 p.m. in Moscow.

Sanctioning Russia’s central bank is likely to have a dramatic effect on the country’s economy and its banking system, Elina Ribakova, deputy chief economist at the Institute of International Finance, said ahead of the announcement of the latest round of sanctions. “This would likely lead to massive bank runs and dollarization, with a sharp sell-off, a drain on reserves – and, eventually, a total collapse of the Russian financial system.”

Sanctions echo Iran, Venezuela

The decision to hit the central bank is a first for an economy the size of Russia. The United States has already sanctioned the central banks of adversaries such as Iran and Venezuela for funneling money that supported destabilizing activities in their respective regions. North Korea’s central bank is also blacklisted.

Russia saw its sovereign credit rating reduced to the trash on Friday by S&P Global Ratings, which lowered its rating by one notch to BB+. Moody’s Investors Service – which currently places Russia a notch above speculative level – said it was reviewing the country for a potential cut.

Ukraine, meanwhile, had its score downgraded by Fitch Ratings to CCC from B, putting it seven notches below investment grade and on par with El Salvador and Ethiopia. Moody’s is also looking at Ukraine.

These decisions by the world’s leading credit assessors came after US and European measures to restrict Russia’s access to global debt markets, but before the latest developments regarding the central bank and the SWIFT system.

Russia remains financially stable thanks to its international reserves and its low level of debt, the Ministry of Finance in Moscow said in a statement on Saturday, responding to announcements by rating agencies. The Ministry of Finance “will continue to maintain a responsible financial and budgetary policy”, the statement said.

The prices of Russian and Ukrainian assets have already fallen during the conflict. The ruble has plunged to a record low and is down around 10% this year against the dollar – more than twice as much as the second worst performing currency – and the Ukrainian hryvnia has fallen around 8%.

Russian stocks have fallen by around a third so far in 2022 as the country’s foreign currency debt prices have plummeted and the cost of insuring against non-payment through credit default swaps soared.

Global Markets

The world’s largest stock markets, meanwhile, were somewhat torn in their response. US and European stock markets rebounded late last week after initially plunging when war broke out. US Treasuries, the world’s largest bond market, have been caught between investors’ desire for a safe haven in turbulent times – which tends to fuel demand for the safest instruments and depress yields Americans – and the potential inflationary effects of this conflict, which could put upward pressure on rates.

A potential concern could be the decision to exclude at least some Russian entities from the SWIFT system. US stocks rebounded on Thursday night after President Biden avoided moves involving the banking messaging system at this point, then surged on Friday as Russia said it was open to holding talks with Kyiv. .

Besides the events on the ground in Ukraine and the reaction of different countries, investors will be very attentive to the impact of rising commodity prices and the reaction of central policymakers. And on that front, the key person is expected to be Federal Reserve Chairman Jerome Powell, who is due to testify before Congress next week.

The decision to ban some Russian lenders from SWIFT could also have wider effects on global funding markets. The decision could lead to missed payments and giant overdrafts within the international banking system and prompt monetary authorities to reactivate day-to-day operations to supply the market with dollars, according to Credit Suisse AG strategist Zoltan Pozsar.

Volatility could heat up on Monday and is already heading for its biggest two-month rise in a year, according to a gauge of cross-asset expectations for price moves in Treasuries, U.S. stocks and global currencies. Treasuries lead the way, with the MOVE implied volatility index jumping to the highest since the early stages of the Covid pandemic.