Currency markets have not avoided the recent sharp losses and dramatic swings witnessed across other asset classes, and strategists are rethinking their strategies in light of Russia’s invasion of Ukraine. In the early phases of the Covid-19 epidemic, the Deutsche Bank Currency Volatility Index soared to near 10% in Europe on Tuesday morning, its highest level since April 2020.
The euro rose 0.4 percent against the dollar on Tuesday, as part of the flight to safe-haven assets subsided, but it was still down more than 4% versus the dollar since the crisis began, as the conflict escalated and attention shifted to the imminent danger to European energy supplies. On Monday, the common currency fell more than 1%, capping its worst three-day drop since March 2020.
Impact on Euro
Zach Pandl and Kamakshya Trivedi, co-heads of global FX, rates, and EM strategy at Goldman Sachs, said in a note Friday that the Wall Street giant’s bullish perspective on the euro was now off the table if the armed war continued.
According to Goldman’s estimates, the euro zone’s downgraded growth prospects last week detracted roughly 1% from the EUR/USD currency pair, while an increase in the Europe-wide risk premium — the additional profits that investors might anticipate for taking on more risk – was worth around 4%. “Given the movements in other market factors, these models imply the euro should be trading slightly lowerdespite the steep drop in EUR/USD,” Pandl and Trivedi wrote.
Impact on East Europe and Russia
According to BMO, the effective restriction on the Central Bank of Russia’s ability to utilize its massive foreign exchange reserves, the majority of which were denominated in euros and kept in EU banks, was central to the extent of the drop last week.
“However, we cannot be certain that the USDRUB screen pricing reflects the genuine price that Russian residents and companies would be compelled to pay for USDs if they were to liquidate their RUB right now.” Russian stock exchanges have been shuttered for the previous week and are scheduled to stay closed until at least Tuesday.