Risk aversion is rearing is ugly head today, with the crisis in the Ukraine as stocks dipped worldwide. On FX, the USD and JPY are the big winners, with EUR, CHF and GBP all down about 40 pips versus the greenback. EM currencies, even those with negligible economy ties to the Russian Federation, have taken on the chin, though again top tier EMs have outperformed relative to there sluggish counterparts. Since Sunday night, MXN has slid about 800 pips against the USD, or 0.6 percent. The South Korean Won has also outperformed. Remarkably, KRW has managed to hold on to most of its gains from last week and has remained steady at 1070-1 to the dollar.
Other EMs have fared much worse. South Africa's Rand has fallen nearly 1500 pips in the past 18 hours, or 1.6 percent. LatinAM currencies have also performed poorly. Over the same period Brazil's Real has fallen a little less than one percent against the dollar.
Poland's Zloty has taken the brunt of the sell off, plunging 2.11 percent today against the dollar. Poland's economic ties to Russia are small but substantial. It sells 5.7 percent of its exports to the Russian Federation. Poland, a client state of the Former Soviet Union for nearly 60 years may also face instability at home if the crisis intensifies. More likely however is that an aggressive Russia may deter Western FDI into former eastern bloc countries.
In sum, I do not expect the events in the Ukraine to affect global markets much in the long term. EM currencies will rally sharply should the crisis get resolved, or even if things just die down. On local eastern European currencies, and the RUB itself, the instability may deter foreign investment, which would be FX negative. On the other hand, I don't see Russian tanks rolling into Budapest or Warsaw anytime soon.
