the towers of st michael s cathedral in russia

Earlier this week, we put out a QuickPick on the move lower (not higher) that we saw during trading on Tuesday. We flagged up several reasons for this, including short covering and support from rising oil prices. The situation has escalated since then, with reports of shelling this morning in Ukraine seen as the start of the next chapter in the saga with Russia. Here’s what you need to know when looking at USD/RUB positions.

RUB weakness being bought

As the initial headlines hit the screens, we are seeing USDRUB spike higher. This was noted with a break above 80 on Tuesday, and a high that we are seeing printed of 89.95 so far today. The longer terms dynamics are definitely in favor of pushing the pair higher, but any immediate spikes are so far being sold.

In terms of reasons for this, we flag up the importance of oil to the fair value of the Ruble. Oil prices have marched higher, with Brent crude up over $101 per bbl and US Crude also closing in on triple figures. These gains are helping to support the local currency, given the exporting nature of Russia’s oil reserves.

Another reason we’re seeing spikes sold is due to the fact that the market was already short RUB going into this week. Escalations have been building for several weeks now, with the threat of war becoming increasingly likely. Therefore, with investors already long the pair (i.e short RUB), levels to take profit would have been placed. Logically, the barrier at 80 would have been targeted, along with levels between 80 and 90 (historical range highs from previous years).

The triggering of these orders to take profit acts to buy RUB, in order to close out the original position. This is also likely acting to support near term RUB flows.

Finally, there are some that think the fair value of USDRUB has been exceeded on war concerns. Markets historically can trade irrationally in the short run due to fear and greed. Some might be of the opinion that the situation will be able to be diffused diplomatically. In that case, it’s logical to think that the pair would trade lower as sanctions are removed and the world returns to a calmer place.

Trading ideas

Firstly, trading emerging market currencies isn’t a conservative trade, especially at the moment. We stress that unless you have a high risk tolerance, it makes sense to stay away from trading USDRUB.

For those that are comfortable, we would still look to move away from trading outright long or short. As we discussed previously here, trading via options can limit potential downside. Given the elevated level on the high side, downside puts could offer a more attractive risk/reward than trying to chase the pair higher.

Looking at the 2014 and 2016 highs around these levels would lead us to conclude that we would need to see tensions heightened further in order to get a break of 90. However, if we do see this, then it really is no man’s land above that level, which could see a much larger jump in the pair as liquidity gets thin. 

The bottom line here is that volatility can offer large rewards, but especially when using leverage, can also generate large losses. 

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