How the Conflict in Ukraine Affects Forex Trading

Unless you’ve been living under a rock for the past few days, you’d know that the conflict in Ukraine has been getting worse by the minute. Before trying to figure out how this affects the forex market, let’s get up to speed with recent events.

While the large protests started only this month, the tension actually started brewing back in November last year when Ukrainian President Viktor Yanukovych turned down a set of political and economic deals with the European Union and decided to make arrangements with Russia instead. Apparently, Ukraine has been suffering debt troubles since 2008 and has been negotiating with the EU for a bailout over the past few years. In a move that shocked most Ukranians and offended EU leaders, Yanukovych decided to approach Russia for $15 billion in bailout funds.

Violence erupted a few days back, as thousands of pro-European protesters flocked to Kiev’s Independence Square and marched to parliament to overthrow Yanukovych. Despite police efforts to keep the political rallies subdued, more than a hundred protesters and police officers have died in the unrest.

Leaders from all over Europe and even the United States have urged Yanukovych and his fellow pro-Russia officials to step down and sign a deal for early elections. This led to the formation of a unity government, with Oleksandr Turchynov elected as interim President, but Russia began questioning the legitimacy of this new leadership. The plot thickens!

Russian President Putin then ordered to have its military forces surrounding the border of Ukraine to be ready for battle. Earlier this week another round of protests ensued in Ukraine, this time from the pro-Russia camp. With that, interim President Turchynov warned that there are signs of separatism in the country. Not only could this split usher in more civil unrest, but it could also heighten the conflict between Russia and the Western nations. In fact, the U.S. has already issued a warning to Russia against “military exercises” being conducted near the border to Ukraine.

As we’ve witnessed in the past, geopolitical tensions like these tend to spur a prolonged risk-off market environment. This type of market behavior, which was particularly evident when the chemical attack in Syria took place last year, typically results to a flight to safety wherein traders move their money to lower-yielding and safer assets. In the forex market, this could lead to gains for the safe-haven U.S. dollar and Japanese yen.

Although a full-scale war will likely be avoided, the ongoing uncertainty doesn’t spell good prospects for higher-yielding and riskier currencies. Do you think the tension will still get worse in the coming days? Let us know by voting through our poll below!