EM Rundown: What the Parallels with Russia's 2008 Invasion of Georgia Mean for Traders

It’s a new week, so naturally there’s a new crisis emanating from the EM sphere. As we documented extensively earlier today, the escalating tensions between Russia and Ukraine are lending a decidedly risk-off tone to the markets as we open the week. In the past few hours, rumors swirled that Russia was demanding that Ukranian forces in Crimea surrender by 5:00am (3:00 GMT) tonight, though the Kremlin has since denied those reports. Meanwhile, both the US and Europe are preparing economic sanctions against Russia, potentially including asset freezes and trade embargos.

Parallels with Russia’s 2008 Invasion of Georgia

The most obvious parallel to the current situation is with Russia’s 2008 intervention in Georgia. In that case, Russia launched a military offensive August 7, ostensibly to protect the ethnically-Russian region of South Ossetia. The climax of the conflict occurred when the Russian Black Sea Navy blockaded the Georgian port city of Abkhazia, forcing the Georgian army to retreat and a rapid ceasefire agreement to be signed on August 15-16, bringing the entire conflict to an end in little more than a week.

The similarities with the Ukranian situation are uncanny (Russian “intervention” to protect an ethnically-Russian semi-independent region, involvement of the Black Sea Navy, etc), so we favor a relatively quick resolution of the conflict at this point. Ukraine’s larger economy and population, as well as its importance as a major oil and gas transportation hub between Russia and Western Europe, suggest that neither Russia nor the Western world stand to gain from a protracted conflict. That said, the situation remains extremely precarious, so one false step could lead to escalating military action and, crucially for traders, more volatility in the markets.

What Should Traders Do?

First and foremost, traders may want to stay nimble and be quick to take profits in such a fluid situation. It’s notoriously difficult to get a long-term read on the price action when geopolitical headlines are driving trade.

As for EM currencies, we’ve already covered the outlokk for the ruble earlier today, but it’s important to note that the developments in Ukraine are also having an impact on other smaller European currencies. The Hungarian forint, for one, is trading as a bit of a proxy for the rarely-followed Ukranian hryvnia.

As the chart below illustrates, the EUR/HUF remains elevated, and the pair is currently consolidating within an ascending triangle formation on the daily chart. This classic technical pattern indicates growing buying pressure, with bulls willing to step in at higher and higher prices, and suggests rates could surge higher if previous resistance in the 314.00 zone is eclipsed. At the same time, the RSI(14) is consolidating in a tight range between 50 and 65; a breakout from this zone could foreshadow or confirm a breakout in price itself.

If we see a bullish breakout this week, buyers could try to push the pair up to previous resistance from late 2011/early 2012 in the 3.16-17 zone. Above that, the January 2012 spike high comes in all the way up near 324.00. On the other hand, if the situation in Ukraine moderates from here, the triangle pattern could also break lower. To the downside, support may emerge near previous  lows around 306.00, followed by 61.8% Fib support (not shown) at 303.00. Be sure to stay tuned to FOREX.com for the latest as the situation in Ukraine continues to develop this week!

Figure 1:

Source: FOREX.com