Currency exchange rates remain unstable, and the ruble loses massively (Daily analysis 28.02.2022)

Ukraine resists the Russian attack - Kyiv remains unconquered. The West reaches for the toughest sanctions and launches arms supplies. The Kremlin responds by putting its nuclear deterrent forces on high alert. This combination of the weekend's news results in another dramatic change in the direction of global markets, with oil back above 100 USD per barrel, the ruble heavily overvalued, the zloty losing, and the dollar and franc gaining. The EUR/USD trades again below the 1.12 mark, and the EUR/CHF dropped towards 1.03 lows.

Ruble: currency collapse, financial crisis and recession

Freezing of the Bank of Russia's assets, reducing the ruble's ability to defend its value. Cutting off selected commercial banks from the SWIFT system handling cross-border payments. Further strikes against the assets of the oligarchs and Vladimir Putin himself, which - according to Sunday's declarations - are likely to be joined by Switzerland. These are the latest economic sanctions announced over the weekend. In turn, the news of oil company BP's intention to divest its stake in Rosneft is the clearest example of ostracism from the private sector. As a result, Russia has been pushed into a profound recession. A run on the banks is already underway, with Russians withdrawing their savings massively and turning their backs on the plummeting ruble.

Given the scale of the collapse of the Russian currency, it is reasonable to speak of a twin crisis: a currency crisis and a banking crisis. It should be added that already today, the European Central Bank is warning of the collapse of Sberbank Europe, owned by one of the largest Russian financial institutions. In order to try to save the stability of the financial system, the Bank of Russia on Monday morning raised its main interest rate to 20% (from 9.5%). It also introduced mandatory resale of foreign currency by companies, which will be allowed to keep only 20% of revenues earned in foreign currency. Additionally, restrictions were announced on the sale of shares by non-residents. On Monday, the first bell on the Moscow Stock Exchange was moved, but trading is under a giant question mark. However, the drastic measures are not enough to protect the ruble from a severe discount. It is losing about 25% against main currencies. One dollar is worth about 110 rubles. For comparison, the rate was less than 70 rubles for a while in October.

Dollar: Federal Reserve and labour market pushed into the background

In the past, under the influence of market turbulence and increased uncertainty, the Federal Reserve has repeatedly modified its plans by postponing tightening or softening its stance. There are less than three weeks left until the Fed meeting at which the rate hike cycle was to be initiated. We do not expect it to be postponed, but the chances of a rate move of more than 25 basis points have fallen sharply. This means that the belief that normalization will be quick and decisive may be losing its relevance. The US currency, like the Swiss, will depend on fluctuations in investment sentiment and information from the East.

It is safe to assume that the Russian invasion of Ukraine will exacerbate global problems with high inflation and will be a drag on economic growth. Clues as to how policymakers view the consequences of the invasion should come from Fed Chairman Jerome Powell's hearings in Congress, scheduled for Wednesday and Thursday. Other policymakers are also expected to speak at length (before the media blackout begins), and the week will be crowned by normally crucial US labour market data. Given the impact of the war in Ukraine on the energy commodity market and rising oil prices, the OPEC+ meeting scheduled for Wednesday will also be crucial.