On Aug. 8, Russia declared war on Georgia. By Aug. 9, it was an all-out war. Reports show that over 2,000 people died during that short time, and more than 100,000 people fled the conflict.
War is never pretty. In war, no one wins ultimately because everyone loses something. However, war has always been and possibly always will be in the future.
So how does this affect currencies? Money hates instability, and there is nothing more unstable and unpredictable as a war. Anything can happen in a war, and you never know how long they will last, or who will win, or who will lose, and what will be lost either way.
The investor is left assuming that the worst will happen and yanks their money until the coast clears.
Russia has long been known for its shady, communist ways. Investors never seem to fully trust the Russians anyway. So money moves away from them very quickly anytime a conflict breaks out, and that's exactly what happened. The ruble tanked more than 4 percent against the dollar in just five days.
Now, that may not seem like much to you. But you have to remember that small movements in currencies add up to a lot in trading accounts. After all, spot forex accounts are commonly leveraged 100-to-1 or even 200-to-1. So 4 percent moves can be magnified to equal a 400 percent to 800 percent move in those five days.
Now if you were on the right side of that trade, then you are shouting for joy! However, if you bought the ruble because it has done well in this energy and commodity boom or just because it has been a one-way bet since 2003, then you really could have gotten it handed to you in just a few days.
Many accounts can't take 400 percent to 800 percent losses on their positions over a five-day period and survive.
So ruble traders really had a wild ride these past five days for sure.
Now if the war truly is over and things somewhat revert back to normal (or a "Russian normal" anyway), then traders will see the drop in the ruble as a bargain and hop on it as a buying opportunity.
However, if the conflict isn't truly over, or if another one erupts, then you will see the roller coaster ride begin again as money runs for cover first, and tiptoes back in after the conflict ends.
It takes a strong stomach to invest in the ruble. Much of the time, it has been a very profitable "one way bet" against the buck since 2003. However, in times like these, you never know what the Russians are going to do.
Investor sentiment drops, and they think twice before investing in Russia's currency.
On the other side of the coin, if you're pulling money out of Russia, you'd better hide behind someone else big. In this instance, many traders ran to the U.S. dollar since it's the "big brother" that might be able to protect them and their money.
However, other traders chose to run to the risk-averse currencies, like the yen and the Swiss franc. Both of these currencies have torn a chunk out of most currencies over these same five days, with the exception of the U.S. dollar.
Right now, the buck can't seem to do anything wrong and is rallying against any currency I have on my screen.
So war really stirs the pot because it not only causes money to run away from the country at war, but it also has to find a hiding place. That hiding place won't be the same for every investor. So this will cause money to run into two or three currencies and shoot them upward at the same time.
While I'd never wish a war on anyone, it sure makes currency trading very interesting to watch during those times.
If you keep in mind where the money will be running away and where it may be likely running to, then you can seize the moment and make some serious gains during times such as these.
Currency trading is all about seizing opportunities from economic booms and busts, but never forget that it is also very politically influenced as well. When one of these politicians declares war, look out below (or, better yet, short the currency).
Then trade it against (or buy) the currency or currencies that you feel will benefit from the conflict.
You should also keep in mind that Russia attempts to control their currency and keep it within a trading band so that it provides stability and protects their exporters. However, most major countries do not do this. So the moves could be even more extreme than they were in this conflict.
The Russian central bank was very active in the market buying rubles in an attempt to support the currency during this time, but you see what effect it still had. The bank couldn't stop the entire slide. However, it did take some of the sting out of it.
So, assess how politically stable an economy is when you are doing your economic homework on a country. If a country doesn't have a good historical track record of stability, you should only put a small amount of your currency investing net worth into it.
The upside to investing in these economies is that a lot of money can be made in a very short time. However, the downside is you need to be more careful and attentive when tensions are rising between countries.
All in all, these currencies are a great place for investment most of the time. This five-day war was one of the exceptions to that rule. However, you'll find that every five-to-10 years, these things happen over and over again. So watch out!
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