'Market for ECB covered bonds too tiny compared to the balance sheet target' - Przemysław Kwiecień, XTB Poland

 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.

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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.

Do you expect the Fed to end QE at the monetary policy meeting next week? What could push the FOMC to continue bond purchases?

I absolutely expect the FOMC to end bond purchases at the next meeting. They made it very clear that a path of tapering is going to be consistent and there is just nothing in the macroeconomic picture of the US to justify confusing the markets with such move as delaying termination of the program. Surely, after the Bullard's remarks there is some talk about it but I think he was just caught in the middle of the market storm and overreacted. I'm quite confident he would backtrack from those remarks by now. Even if the Fed is concerned about inflation expectations or the impact of the global slowdown they still can play with the timing of the first hike.

Will ECB's covered bond purchase scheme help revive the Eurozone economy in your opinion?

Well not really. The market for these bonds is just too tiny in comparison to the balance sheet target (which is extra one trillion euro) and even if the Bank could buy as much assets as it would like to, the successful impact on the economy is far from guaranteed. Europe keeps paying the price of not carrying over structural reforms in the good times and the ECB cannot really take over on this field.

Do you expect Russia and Ukraine to reach a consensus on the supply of gas? Could Russia interrupt supplies of gas to Europe in case of further complications in Ukraine's situation and how big of a blow would that be?

Russia is playing a political plot so I think it's not going to be settled any time soon for good. Putin may do occasional tricks to Europe to show his strengths but he is too dependent on Europe to really go all-out. I think he will like to keep the current status at the Ukraine while getting European sanctions softened and will use gas talks to achieve that.

Is the EUR/USD's recovery from 1.2500 for sure? Do you expect a 1.3000 test or a successful break below 1.2500?

Well I'm not looking for any major recovery on the EURUSD. Indeed my year-end forecast for the pair is 1.25 so it may very well dip below that level this quarter. The diferrential in market rates will widen and push the pair down for as long as the Fed is keeping the hike-in-the-mid-of-2015 agenda. The data indicates they should stay put with it and if so, the pair is heading towards 1.25.

GBP/USD sold off on BoE meeting minutes and it tested the 50% of the move up from the 2013 low to the 2014 high at 1.6000 area. What is your take on Cable?

Unlike the USD where a retracement in market rates was sentiment driven, for GBP it is macro driven which makes the case for a stronger pound tougher to defend. Not only wages are not growing but now the MPC needs to deal with a rapidly declining inflation as well and my guess is they are quietly chatting "gosh, so good we havnt hiked those rates". They will wait with a hike for as long as they are sure the inflation outlook is back on track and right now we don't know how long will it take. So the Cable looks prone to a further slide over the medium term.