SEK Pushes On
The euro has drifted lower in the European session though conviction has been low, with a busy week ahead and pressure will be on for the ECB to actually deliver in the right setting. The Swedish krona was the standout mover, setting a 12-year high versus the euro after some stronger than expected Q2 GDP numbers (+1.4% q/q), driven by a resurgence in consumer demand. Consumer confidence indicators have been highlighting a resilient domestic economy in Sweden and the backward-looking GDP numbers are largely a reflection of this. Diversification flows into Sweden are clearly keeping the currency supported, though it remains a crowded trade. This week sees the Fed, ECB and BoE all meeting on policy but there is no doubt as to which policy board is under the most pressure. Nevertheless, we still question whether even a commitment to reactivating the SMP will be considered the right response at this stage and manage to buy the Eurozone any more than a few weeks of respite, or less. Tail-risk elimination is important with the effective establishment of a lender of last resort is certainly welcome, but it is no substitute for deep structural reforms, which are still much-needed. In addition, the ECB will not want to reduce the incentives for reform, which it found to its own cost late last year, but it remains cognizant of the underlying market risk and Draghi’s press conference this Thursday will need to strike the right balance. For the Fed though, the case for new stimulus remains difficult to gauge. Those looking for the US Q2 GDP report to cement the case for further Fed easing on August 1 were disappointed by the 1.5% headline real GDP growth print. To be sure, this was largely as expected, with slower consumer spending growth (to 1.5% from 2.4%) countered by improvements in equipment and software spending (to 7.2% from 5.4%) and exports (to 5.3% from 4.4%). Inventories also picked up, and we still see downside risks to our 2.5% growth assumption for H2. The revisions offered no fresh guidance – Q1 growth was raised modestly to 2.0% from 1.9%;. 2011 was raised 0.1pp to 1.8%; 2010 down 0.6pp to 2.4%; and 2009 up 0.4pp to -3.1%. However, in a market already positioned for slower US growth, the key point to stress is that there were no major negative surprises that would convincingly skew the risks towards Fed easing on Wednesday.
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