Strategy Note /

Which currencies are most sensitive to the Russia-Ukraine Crisis?

  • Geopolitical and trade sensitivities weigh on Eastern European currencies

  • CEE currencies feel the burn of the Ukraine crisis

  • Bearish bets intensify on Ukraine risks

Edmond Muzinda
Edmond Muzinda

Financial Market Analyst

ETM Analytics
24 March 2022
Published by

Which currencies are most sensitive to the Russia-Ukraine Crisis?

Aside from the lives that are lost, wars have severe economic costs as they destroy infrastructure, result in a decline in the working population, create shortages and uncertainty and disrupt economic activity. Russia’s attack on Ukraine is no exception to the rule, as we have seen all these consequences manifesting since the invasion of Ukraine.

The report aims to highlight the consequences of the war, evident from the developments that have been seen in the currency markets. The impact of the war alongside sanctions imposed on Russia in an effort by the West and its allies to isolate the country and cause economic and financial ruin for its aggression on Ukraine has sent shockwaves across financial markets. European markets, particularly Central and Eastern Europe countries, have come under a great deal of pressure given their proximity to the war and trade sensitivities with Russia and Ukraine.

Geopolitical and trade sensitivities weigh on Eastern European currencies

Emerging market currencies have been broadly on the defensive since the onset of Russia's attacks on Ukraine as investors flocked to safety. That said, the extent to which the Ukraine crisis has hit EM currencies has not been equal, with currencies more exposed to the two countries coming under considerably more pressure. Eastern Europe currencies, in particular, have sold off sharply since the invasion began on February 24. Russia and Ukraine are key trading partners for Poland, Czech and Hungary, with the three countries heavily reliant on natural gas, oil and wheat imports from Russia and Ukraine. Russia supplies a significant portion of oil and gas imports into the CEE region.


CEE currencies feel the burn of the Ukraine crisis

Since the onset of the war in Ukraine, CEE currencies have underperformed their emerging market peers, losing as much as 4% to 8% against the USD in the days that followed Russia’s invasion of Ukraine. CEE currencies have since staged a recovery, paring back a large portion of their losses. Some support for the currencies has come on the back of interventions by the central banks in the FX market. The whippy price action in CEE currencies has seen the likes of the HUF, PLN, and CZK move from the bottom to the top of the ranks in terms of volatility.

Implied volatility in the three main CEE currencies has surged on the back of all the uncertainty pertaining to the Ukraine crisis and potential spillover effects for these countries. As can be seen in the chart below, 3-month implied volatility in the HUF, PLN and CZK have surged to unprecedented levels in recent weeks, with implied volatility in the HUF and PLN climbing to around 15%.

Moreover, the premiums for hedging against PLN and HUF weakness are trading at levels above the peaks seen during the global pandemic outbreak. Volatility in the HUF is the highest in the region, sitting north of 11.0% at the time of writing. Aside from the geopolitical risk, the market is also pricing in the political risk ahead of Hungary's April 3 elections.

Bearish bets intensify on Ukraine risks

The risks associated with the Ukraine crisis has triggered a marked increase in bearish bets in the options market as traders hedge against further losses. The jump in bearish bets in the professional market is evident when looking at the sharp increase in 25-Delta risk reversals, which have surged since the war in Ukraine erupted.

For the EUR-PLN, the premium of contracts to sell the unit over those to buy it in the next three months sits at 3.84%, the highest in the region, and compares to 0.71% at the end of last year. It is a similar story for both HUF and CZK.

ETM’s Currency Resilience Model, which looks at the underlying fundamentals of a currency, shows that both the HUF and PLN are particularly fragile and susceptible to further losses should the risks linked to the Ukraine crisis intensify.  


CEE currencies have been subject to the increasing volatility in the global financial markets recently stemming from the conflict between Russia and Ukraine, mainly due to their proximity to the war. As a result, this triggered rotation away from these currencies toward assets emerging markets that are less sensitive to the war. Rising global crude oil prices, stoking inflation pressures, alongside threats to growth and deteriorating terms of trade, are adding to the headwinds facing CEE currencies.  

The vulnerability of CEE currencies to unfavourable conditions (i.e. contagion risks emanating from the Russia-Ukraine war) can be understood from the lens of ETMs FX Resilience Model. As evident from the adjacent chart, CEE currencies are ranked amongst the lowest of the twenty-two currencies tracked by our resilience model. The PLN and HUF have a final score of 2.1 and 1.7 as they demonstrate weakness across all facets, namely fiscal, monetary and fundamentals rectitude.