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Sterling and Swiss franc no havens from eurozone storm

European currencies, including the pound and safe haven of the Swiss franc, will lose ground against the US dollar and Japanese yen, as investors minimize exposure to Europe as the euro crisis intensifies, says Citi.

The eurozone continues to weaken and risks entering a recession, while European leaders’ recent progress to tackle the crisis has stalled and the political crisis in Greece has, once again, caused sentiment to come crashing down. Fears of a disorderly Greek default in August and September forced investors to cycle through candidates for European safe-haven currencies – mainly the Swiss franc, but also the British pound and, briefly, the Scandinavian currencies.

As the tail risks of a euro-area break-up now resurface, the search for safe-haven currencies in coming days is likely to build up again, but previous European candidates “could hardly be less appropriate”, says Valentin Marinov, FX strategist at Citi.

“The growing threat of a potential Greek exit from the eurozone will fuel a deep financial and economic crisis, impacting all European economies.”

If the situation in the eurozone does deteriorate to the point of no return, the Swiss franc and other, so far, resilient European currencies will soon falter, as investors flea Europe and return to the mother of all safe havens: the US dollar.

“The traditional safe haven the Swiss franc will lose ground against the US dollar as well as the Japanese yen, given the close economic and financial ties between Switzerland and the euro area,” says Marinov.

 Bank exposure to eurozone debt as a % of GDP

 Exports to EU as a % of GDP

Source: Citi, BIS

BIS data on bank exposure to public and private borrows in Greece, Italy, Ireland, Portugal and Spain paints a particularly worrying picture for Switzerland. The total claims of banks to these countries amounts to more than 24% in Switzerland, beaten only by the 26% of GDP in the UK.

An ensuing eurozone crisis would also dramatically hit the real economy of European countries, with Switzerland likely to be one of the most heavily affected. Looking at the share of exports to the EU as a percentage of GDP, it shows Switzerland leading the way, with EU export exposure amounting to almost 25% of GDP.

Investors will make efforts to minimize their exposure to Europe altogether, as confidence in the eurozone wanes and fears of a potential Europe-wide financial and economic meltdown build. The Swiss National Bank could start to find it easy to maintain its EURCHF exchange rate floor at SFr1.20, as even the Swiss franc, the previous stalwart during any financial crisis, may soon begin to lose favour.

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