'We should not be surprised by the BoE minutes' - Adam Narczewski, XTB Poland


John
 Adam
Narczewski

PROFILE:
• Current Job: Deputy Regional Director at XTB Poland
• Career: Market analyst at XTB Poland. Frequent guest of TV shows on TVN CNBC, CNBC Europe & World, Polsat News.

Daily FX View profile at FXstreet.com

Adam Narczewski is currently the Deputy Regional Director and a market analyst at XTB Poland. He has explored the secrets of finance at Winthrop University in South Carolina (USA) where he acquired invaluable experience. He specializes in international markets, fundamental analysis and practical application of options and in investing. Trades forex on international markets and stocks on the Warsaw Stock Exchange. Adam is a candidate to the CFA designation, also a speaker on seminars regarding structured instruments, financial engineering and advanced financial instruments. Adam is a frequent guest of television programs in Poland - TV Biznes, TVN CNBC, CNBC Europe & World, Polsat News and radio show.


Do you expect the BoE minutes, due out next week, to reveal any dissenting votes on rates?

In the previous minutes we could read that the BoE expects an increase in wages, which it did not realize. In the Inflation Report the bank focused on wage increases and often mentioned its importance. A big revision was made – wages were expected to increase by 2,5% by the end of Q4 2015, now it is only 1,25%. Also, the GDP growth was revised downward. Also inflation seems will remain low for some time. Because of this kind of statements by the BoE, the market expects no interest rate changes this year although the bank has not suggested this directly. Mark Carney, who can be discribed as a hawk, changed his tone to more dovish. His last press conference proved when he said that „this is not a good time for the first interest rate hike”. I believe that since Carney (hawk) is not a fan of higher interest rates now, other BoE members also do not see space for tightening monetary policy. In the previous statements we could read that inflation will depend upon wage increases, and the current data shows those have been falling. All of the above make me confident that with the publication of the BoE minutes we should not be surprised.
Was the ECB Governing Council's decision to keep monetary policy on hold in August justified in your opinion? When should the central bank start making adjustments and of what kind?
The TLTRO is expected to be introduced in September and December of 2014 so monetary policy is being losen. Draghi keeps saying the ECB is ready to use unorthodox measures (meaning QE) if infaltion projections prove it is necessary. Weak macro data from the Eurozone could give the impulse to some action by the ECB. The markets are waiting for info about QE, so today’s GDP reading from France and Germany could be treated as closing to „manual” stimulation of the economy. Stock indices are up in Europe so it can be said trades see the possibility of intervention by the ECB. Let’s keep in mind that for ECB is inflation that counts (projections). The current inflation is importatn since it decides upon the beginning of the inflation path. For the ECB what counts though, are the chances that the target will be achived (slightly below 2%) in about 18-24 months. That is why the economic situation is so crucial. If the ECB expects demand will increase, it can be expected inflation will get closer to the target. Nowadays, the data shows the prespectives are worse with inflation being well below market expectations. Negative suprises are Spain and Italy, which are on the border of deflation. To make it worse, Italy is in recession, which makes deflation more probable. The dark macro outlook is saved by economic activity indicators, mainly in the services sectors. Still, the macroeconomic outlook is rather pessimistic. It is too early for the ECB to act but Mario will be ready for sure if the situation requires such moves.
Do you believe that fears of the Russian army intervening in Ukraine are well-founded? How would markets react in such circumstances and where would the blow be felt most?
In the closest perspective, if the Russian humanitarian aid will not be just a pretext for the presence of Russian in Ukraine (or a military intervention later on), emerging markets should remain stable. The possible depreciation of currencies and stock market declines should not be drastic. In light of the conflict, the biggest loser is the Russian Ruble. Let’s keep in mind that the harshest sanctions against Russia include restricted access to Western financial markets and the lack of funding for national banks by Western capital. If the conflict is not resolved soon and the situation worsen, we will certainly see a flow of capital to safe heaven assets like gold and U.S bonds. Emerging market currencies like the Zloty, Forint or Czech Crown (which are much dependent upon geopolitical factors) could depreciate dramatically. In summary, the strongest blow would receive caountries that geographically are close to Russia and Ukraine.
EUR/USD is trading at lows since November, some experts expect the pair to fall below the 1.3000 area in the middle-long term. What do you think?
This is a very probable scenario. The QE program will end soon and macro data from the U.S is really optimistic. At the same time chances the ECB will act due to worsening situation in the Eurozone increase. All this favors the USD. So in short-term the EUR/USD has a chance to touch 1.35000 or even higher levels, in the next 3 months I also see it attacking the 1.3000 support.
The USDJPY has been trading inside a 101.20/103.05 range in the past months, do you see a break of 101.00 or 103.20? Does that will decide the next impulsive move?
In general, volatility on the USD/JPY is pretty low. The Bank of Japan has been quiet for some time so it is hard to expect any moves from them. I would rather look at the EUR/USD, and the moment it falls down. That could trigger an upward move on the USD/JPY, which could break through 103.20 and target 105.00.

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