'The euro may weaken soon as interest rate cut is in the pipeline' - Przemysław Kwiecień, XTB Poland


John
 PrzemysÅ‚aw
  KwiecieÅ„

PROFILE:
• Current Job:  Financial analyst at XTB Poland
• Career: Advisor to the Minister of Finance in Poland. Market economist at Millennium S.A, Poland.

Daily FX View profile at FXstreet.com

PrzemysÅ‚aw KwiecieÅ„ is an advisor to the Minister of Finance of Poland. He has done research and forecasts on the economy and the fiscal policy, and cooperation and advising at the preparation of MF’s official documents (budget assumptions, convergence programme, debt strategy, euro adoption strategy). He excels in market research and advising to debt officers. He has also done research and forecasts on the Polish economy, the US and the eurozone economies.


What do you think of Ukraine's decision to use $1 billion from the first part of IMF's loan amounting to $3.2 billion to increase Ukraine’s gold and currency reserves? Do you believe that Kiev will manage stick to the harsh conditions IMF requires in exchange for the loan?

Well, honestly it's hard to believe in anything when it comes down to Ukraine at the moment. The very first step that must be taken is to restore internal peace and order. Secondly we need to have the new president and the government elected. Only then economic reforms may look credible.
Do you expect the ECB to modify monetary policy in June? If so, what actions could the central bank take?
Absolutely. We expect the Bank to cut the MRO rate by 10 to 15 bps. At this stage we do not think the Bank will cut deposit rate, although this remains a possibility as well. The MRO plays a key role now as a depleted overliquidity drove market rates from a depo rate towards the MRO. Just as few months ago the depo rate was a main policy rate, right now it's no longer the case. The ECB can address the problem of elevated market rates (that keep euro strong) with either the MRO cut or/and increasing liquidity (for instance by no longer sterilizing the SMP). The cut is more reliable so we think this is that the Bank is going to do. Just remember the projection needs to be favorable for such move.
The UK economy has been showing signs of a strong and stable recovery for some time now, while house prices continue rising. When do you expect the BoE to step in and what measures could it take?
The BoE has a tough choice to make here. I think they will not address housing boom with interest rates at this point and will turn to regulations instead (higher capital requirements, lower L/V ratios etc). Interest rates will be chosen to optimize inflation and unemployment. Right now market rates are quite high yet the first hike is priced for a spring of 2015. The projection that will be published this Wednesday will be very important. If it shows a lower unemployment rate that in February (despite market rates being higher now) a speculation regarding a hike at the turn of the year may start.
According to experts, the ECB has a big problem with interest rates regarding to hike rates, if ECB decides to, bank's profit would collapse. What do you think?
Well, technically this could be true if the Bank increases rates in the near future. Since the contrary will happen I do not think it's something to be worried about right now.
The EUR/USD is testing pre-1.40 levels on US dollar weakness environment plus talks on Russians buying euros in any dip; Do you see the EUR/USD reaching fresh highs?
Not really, I think what we saw on Thursday was the peak. The euro is overvalued and that may change soon as the interest rate cut is in the pipeline. The dollar, on the other hand is undervalued. We see the pair at 1,36 at the end of June and 1,34 at the end of the year.
Talks about a possible negative growth in the US in the Q1 are pushing the dollar under pressure; the USD is now pricing at 6-month lows, what is your take on the US Dollar?
A weakness of the dollar was puzzling indeed. If a player like the Goldman Sachs tells you the dollar is weak because of the "dark matter" something strange must be going on. Well in our view there were couple of factors working against the USD. First we have seen a very unusual twist in the US yield curve. The FRA rates like 18x24 or 12x15 made up for the only segment responding to a strong data and indicating the market was gaining faith in this "dotted chart" (the chart showing the FOMC consensus for the main rate at 1% at the end of 2015). However, at the same time, long term yields declined (weaker equity market is one factor here) and most importantly the very short term rates (up to 1 month) kept declining as the Fed keeps printing money (even if at a slower pace). Compound it with declining liquidity in EUR, bullish stance on GBP and NZD and some wear on the BoJ talk and you end up with many investors simply not willing to hold USD just now even if (us included) they believe a major USD rally is just around the corner!

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