CANADA FX DEBT-C$ hits 2-month high after Fed's new bond-buying

Wed Dec 12, 2012 4:27pm EST

* C$ closes at C$0.9847 to US$, or $1.0155
    * C$ hits two-month high of C$0.9827, or $1.0176
    * Fed announces new bond-buying program; rate unchanged
    * Bond prices fall across curve

    By Solarina Ho
    TORONTO, Dec 12 (Reuters) - The Canadian dollar touched its
strongest level against the U.S. dollar in nearly two months on
Wednesday after the Federal Reserve announced a new round of
bond purchases to stimulate the U.S. economy.
    The Fed committed to monthly purchases of $45 billion in
Treasuries on top of the $40 billion a month in mortgage-backed
bonds the U.S. central bank started buying in September. The
action comes ahead of the year-end expiration of its "Operation
Twist" program, under which the Fed has been buying $45 billion
in longer-term Treasuries with proceeds from the sale of
short-term debt.  
    "It was exactly what we thought they would do. I think that
the currency market reacted because some may have thought that
they wouldn't have rolled over all of what they were doing under
the Twist buying into quantitative easing," said Avery Shenfeld,
chief economist at CIBC World Markets.
    "There are market participants who view quantitative easing
as having a negative impact on the U.S. dollar, but positive for
other currencies," Shenfeld added.
    The Canadian dollar finished Wednesday's session at
C$0.9847 versus the greenback, or $1.0155, stronger than
Tuesday's North American close of C$0.9862, or $1.0140.
    Shortly after the Fed's announcement at 12:30 p.m. (1730
GMT), the currency firmed to an eight-week high against its U.S.
counterpart of C$0.9827, or $1.0176, but pared back to
pre-announcement levels during the press conference by Fed chief
Ben Bernanke.
    "It may not be because of what Bernanke is saying, it may be
just second thoughts on really whether any of this is that
material to the U.S. dollar exchange rate," said Shenfeld.
     The Fed on Wednesday also took the unprecedented step to
keep rates steady until the U.S. unemployment rate falls to 6.5
percent and as long as inflation was projected to be no more
than 2.5 percent one or two years ahead and inflation
expectations were contained. 
    The Canadian dollar's performance was mixed against major
currencies. It outperformed the Japanese yen and
soared to its strongest level in about 8-1/2 months. 
    The struggling yen was pressured by bets the Bank of Japan
will take more aggressive easing steps after a likely victory of
the Liberal Democratic Party in the country's election on
Sunday.  
    The Canadian dollar underperformed the euro, the
British pound and fellow commodities-linked
currencies including the Australian dollar. It
touched a 9-1/2-month low against the New Zealand 
dollar.
    "I think all of these reactions will be short-lived into
year-end, which would be consistent with the view that monetary
policy is having incrementally less and less influence at the
margin versus other more dominant and sustained influences,"
said Scotiabank economists Derek Holt and Dov Zigler in a
research note, adding that the chief risk toward the end of this
year is the U.S. fiscal crisis.
    Canadian government debt prices were lower across the curve,
tracking U.S. Treasuries, where yields rose after the Fed
statement at the close of the meeting of its policy-setting
Federal Open Market Committee.
    "The impact of the FOMC statement has been to push Treasury
yields higher and steepen the curve, while equities are
gathering momentum and inflation break-evens are slightly lower
than pre-statement," Richard Gilhooly, interest rate strategist
at TD Securities, said in a note. "There are a lot of moving
parts to what the Fed has announced."
    The two-year bond slipped 3 Canadian cents to
yield 1.092 percent, while the benchmark 10-year bond
 gave back 30 Canadian cents to yield 1.762 percent.
FILED UNDER:
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