EM Rundown: All Eyes on USD/RUB 36.00 as Ukraine Violence Intensifies

The ongoing situation in Ukraine took a clear turn for the worse over the weekend. On Friday, clashes between activists resulted in the loss of over 40 lives in the port city of Odessa, and the death toll has continued to rise today as Ukrainian security forces battled rebels in the city of Slovyansk. The release of 12 hostage European military observers by pro-Russian activists provided a momentary respite from the onslaught of negative news, but many expect the violence to get far worse before it gets any better.

Beyond the tragic human toll, there is a growing risk that the violence will entail substantial economic costs for Russia as well. On Friday, leaders of the US and Germany agreed to impose harsh sector-wide sanctions on Russia’s economy if the Ukrainian Presidential elections, currently scheduled for May 25, are interrupted by the unrest. While the West’s economic sanctions thus far have been criticized as “toothless,” optimists hope that coordinated sanctions on Russia’s critical energy, financial, and arms trade sectors may finally present a meaningful deterrent against escalating clashes, though Russia would argue that it can do to little to control the rebels in Ukraine.

As for the markets, the recent developments have led to a distinctly risk-off reaction in the market. As we’ve noted previously, traditional safe havens like the Japanese yen and gold have caught a bid, while traders are selling riskier assets like equities.

Given the geopolitical risks, the Russian ruble is holding up surprisingly well. The USD/RUB ticked slightly higher to open the week, but rates are essentially unchanged from last week’s levels in the upper-35.00s. In our view, the developments over the past 72 hours represent a dangerous shift from the posturing and “war of the words” that has characterized the previous two months; as a result, the ruble may see further losses this week.

From a technical perspective, the USD/RUB has been carving out a symmetrical triangle pattern for the last two months. This classic price action pattern suggests that we should see a strong continuation once the pattern breaks out, and given the previous uptrend, the odds favor a bullish break. In addition to the price action pattern, the RSI indicator is forming its own corresponding symmetrical triangle. As always, a breakout in an indicator pattern can often lead/confirm a breakout in price itself, so traders are encouraged to keep a close eye on RSI this week.

If USD/RUB can break above 36.00, a bullish continuation toward the near-term 78.6% Fibonacci retracement at 36.30 or the all-time high at 36.90 is likely. On the other hand, an unexpected de-escalation of the tensions could result in a sharp drop back toward the 3-month low at 34.90 later this month.