EUR/USD closing in on 2022 lows at 1.1120CBR intervention likely burden on EUR/USDEUR/RUB & EUR/PLN mismatch a subtle tellFurther EUR/USD downside could be limitedUSD/RUB take off may lift EUR/RUB to 111+

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The Euro to Dollar exchange rate closed in on 2022 lows around 1.1120 Thursday as financial markets attempted to digest the tragedy unfolding in Ukraine, while the EUR/RUB pair took to the skies in a rally that could soon see it trading up to all-time highs of 111.80 or more.

Europe’s single currency came under pressure against many counterparts as Russian military forces persisted in an unprovoked attack on Ukraine, although EUR/USD declines likely have as much to do with the Euro’s position as the largest holding in the Central Bank of Russia’s (CBR) foreign reserves as they do the Eurozone economy’s exposure to the unfolding tragedy in Eastern Europe.

“We condemn in the strongest possible terms Russia's unprecedented military aggression against Ukraine. By its unprovoked and unjustified military actions, Russia is grossly violating international law and undermining European and global security and stability,” the European Council said.

“We also condemn the involvement of Belarus in this aggression against Ukraine and call on it to abide by its international obligations. We demand that Russia immediately ceases military actions, unconditionally withdraws all forces and military equipment from the entire territory of Ukraine and fully respects Ukraine's territorial integrity, sovereignty and independence,” leaders of the European Union member states added.

Above: Euro-Dollar rate shown at daily intervals with selected moving-averages.

EUR/USD reference rates at publication:

Spot: 1.1137High street bank rates (indicative band): 1.0782-1.0860Payment specialist rates (indicative band): 1.1072-1.1117Find out more about market-beating rates and service, hereSet up an exchange rate alert, hereThursday’s statement from the European Council came after Ukrainian borders with Russia and Belarus were reported to have been overrun by a large military force during the overnight session and early in the European morning as Moscow commenced an all-out invasion of its largest neighbour.

Much has been made in recent weeks of the Eurozone’s economic vulnerability to the energy price implications of a conflict in Ukraine, which would appear at first glance to explain the single currency’s underperformance on Thursday, although another explanation would be more likely.

“To stabilise the situation in the financial market, the Bank of Russia has decided to start interventions in the foreign exchange market, extend the Lombard List, and provide the banking sector with extra liquidity today,” the Central Bank of Russia said in a Thursday statement.

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Europe’s single currency is by far the largest holding in the CBR’s foreign exchange reserves, which were reported to be worth around $497BN at the end of January 2022, with some 29.5% of them held in Euro denominated securities at the last disclosure.

This matters greatly in light of the CBR’s statement as the latter suggests it would be selling Euros in exchange for Roubles as part of an effort to slow the inflationary depreciation of its currency, and the Polish Zloty’s Thursday underperformance of the Rouble would be evidence of this.

“This may limit the amount of ruble weakness we are likely to see for now. However, extreme moves whereby USDRUB reaches and breaches the 100 mark are possible if the Crimea market playbook from 2014 plays out,” says Mark McCormick, global head of FX strategy at TD Securities.

Above: EUR/RUB shown at hourly intervals alongside EUR/PLN.

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While the extent of any further downside in the Euro-Dollar rate remains to be seen, one thing for certain is that CBR foreign exchange reserves are limited in size and therefore can be depleted in a crisis like the present, which is a major upside risk for the EUR/RUB exchange rate.

The Euro-to-Rouble exchange rate is mechanically connected to the USD/RUB exchange rate and in a way which leads it to closely reflect the relative performance of EUR/USD and USD/RUB, which is why the USD/RUB call from TD Securities’ McCormick matters for EUR/RUB.

With the Euro-Dollar rate trading around 1.1180 on Thursday, the Euro-Rouble rate would be likely to rise to all-time highs of 111.0 or more in near future if the USD/RUB reaches the round number of 100.00 that was billed as a possibility by McCormick.

“The situation is still very fluid. Sticking to the market impact (the human cost, while very tragic, is beyond the scope of what we do), this is an inflationary event,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

“The next stuff to watch: i) whether the next round of sanctions will target key commodities/energy exports from Russia, ii) whether Russia is cut off from SWIFT, and iii) how Russia responds to sanctions (export controls?). Our calls will be based on how the above plays out. That’s about all I can say for now,” Rai and colleagues wrote in a note to clients on Thursday.

Above: USD/RUB and EUR/RUB shown at monthly intervals.