February FX Roundup

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Throughout February, developments across the foreign exchange market have been chiefly characterised by the Ukrainian Crisis, culminating in the Russian invasion of the country and subsequent reactions around the globe.

Additionally, and in keeping with the prevailing trend, the market also paid close attention to any rhetoric around the prospect of further interest rate hikes, following the start of the month where the Bank of England voted to raise rates by 25bpt to 0.5%, while the ECB held firm at 0%.

Following the Russian invasion of Ukraine, subsequent EUR weakness saw GBP/EUR breach the technical level of resistance of 1.20347 (where it had approached, but not breached, this rate five times previously across the month), seeing sterling rise to around the 1.20350 level on the 24^th February. Looking further ahead, a breach of 1.20462 would put sterling at five-year highs against the euro.

While GBP/USD saw some appreciation throughout the first three weeks of the month (rising from 1.3445 on 1^st February to around 1.3637) the relative appreciation was reversed by the Russian advance on Ukraine starting on 23/24^th February. This initial appreciation in GBP was primarily owing to the first tranche of international sanctions on Russia (announced around 22^nd February) being softer than the market had expected – which thus fed into some dollar weakness. However, following the developments on the evening of 23^rd/24^th February (when Russian forces advanced their invasion into Ukraine) sterling dropped from just under 1.3550 to lows of around 1.3275.

Over the month the technical level of resistance for sterling stands around the 1.3637 mark with the pound testing – but not breaching – this level of on four occasions. Over February, while the dominant level of support for sterling stood at 1.3515, the risk-off sentiment following the Russian-Ukrainian developments saw this support level smashed through dropping to below 1.3300. 

Following the invasion, in the 24-hour period between noon on 23rd and 24th February, safe-haven assets such as gold and USD saw considerable appreciation with the commodity hitting 15-month high of $1,973 USD/t.oz while the DXY was up around one percent.

Again, in the 24-hour period between noon on 23^rd and 24^th February, day ahead natural gas prices in the UK were up some 33% while Gazprom fell 39%. Similarly, oil prices rose above $100dpb for the first time since 2014 with Brent trading at 8.3% higher at $104.85dpb as the prospect of a decrease in supply through further sanctions on Russia hit market sentiments. Agricultural indexes also rose significantly given how prevalent Ukraine’s agricultural market is on the world’s supply – particularly in relation to wheat which is one of its key exports. Additionally, given that Russia produces some 40% of the world’s palladium, the metal rose 8% on the 24^th as the market considered the implications of curtailments in supply. Likewise, nickel hit its highest level in a decade with aluminium breaking its all-time level of $3,420.

Equities around the globe were hit substantially, with European banking stocks opening 4% lower on 24^th February while the FTSE 100 was down by around 3.3%. Countries bordering Ukraine also saw their stock index hit particularly hard with for example Warsaw’s stock market falling more than 10%.

Meanwhile in Russia, the MOEX closed 33.3% lower – representing a four-year low – with Russia’s financial institutions bearing the brunt given their exposure to western sanctions. For instance, Sberbank (Russia’s largest lender) was down 48% as markets waited to gain more information on the extent of these further sanctions. This encouraged Russia’s state bank to look for ways to increase liquidity.    

Sanctions

The Western reaction has been primarily centred on establishing further economic sanctions on the Russian Federation and high net worth Russian oligarchs and individuals. Although the reality remains that such sanctions have thus far been ineffectual at deterring or dissuading Putin’s aggression.  

So far, the UK government has placed sanctions on some 100 businesses and individuals. The first tranche of measures announced in Parliament on 22^nd February included sanctions on Rossiya, IS Bank, General Bank, the Black Sea Bank and the Promsvyazbank. However, the effectiveness of many of these sanctions was put into question. For example, sanctions on Promsvyazbank are unlikely to affect the situation given that it is a domestic rouble-based bank that is predominantly based in the domestic defence sector – and thus has little international exposure. Meanwhile, over in the US, Washington imposed sanctions on one of the largest investment companies in Russia, VEB bank. However, it is important to consider that there is a one-month grace period in order to ensure that any contracts which may involve American firms can be settled which hence undermines the sanction’s effectiveness.  

Officials within the Kremlin have stated that Russia is well prepared for any such sanctions with, for example, Vyacheslav Nikonov, the First Deputy Chairman of the State Duma Committee on International Affairs Vyacheslav Nikonov (and the grandson of the Foreign Minister under Joseph Stalin, Vyacheslav Molotov) stating that the sanctions introduced were “a laughable affair”.  Russia maintains some $650bn in foreign exchange reserves and additionally run a budget surplus and their low GDP to debt ratio.

Moreover, in recent years domestic banks have accounted for a greater proportion of Russia’s debt with overseas investors now owning only around 20% of it – down from around 35% in 2019. Although it is worth noting that in the US there has been a ban on buying dollar-denominated Russian debt since 2014 (following the Russian Annexation of Crimea) and rouble denominated debt since last year. Hence, while the yield on 10-year rouble denominated bonds have increased from 7% in September to around 10.9% today, it is evident that the current sanctions from the global community have not been sufficient in deterring Russia’s continued invasion of Ukraine. 

As the military conflict and humanitarian crisis escalate in Ukraine there will be growing pressure on the West to impose further financial and economic sanctions to cripple the Russian economy and stifle its military adventurism. This could include banning Russia from the SWIFT payment system which so far, the EU have been reluctant to do. Therefore, as of midday on the 25^th February, the crisis in Ukraine remains a desperate situation with the stability of Kyiv in question and the livelihoods of millions of Ukrainians under threat. The ensuing escalation will engender considerable military and civilian casualties and fatalities, which will require the global community to take considerable and meaningful action in order to dissuade, deter and halt the Kremlin’s aggression.

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