CANADA FX-C$ stumbles as Bernanke comments drive broad US$ strength

Wed Jun 19, 2013 5:10pm EDT

* C$ at C$1.0273 vs US$, or 97.34 U.S. cents

* Fed expected to slow bond purchases, halt mid-2014

* Poloz maintains Bank of Canada policy

* Bond prices fall sharply across maturity curve

By Solarina Ho

TORONTO, June 19 (Reuters) - The Canadian dollar fell sharply against a broadly stronger U.S. dollar on Wednesday and bond prices slumped after the Federal Reserve expressed optimism about the U.S. economy and labor market.

Fed chief Ben Bernanke also said the Fed is expected to slow the pace of bond purchases later this year and bring them to a halt around mid-2014. The comments weighed on stocks and pushed bond yields to a 15-month high.

"Clearly Bernanke was the dominant force ... the Fed's become incrementally more optimistic about the outlook in terms of just shading down some of the downside risk," said David Tulk, chief Canada macro strategist at TD Securities.

"The taper talk really was in play, and we see that follow through. It's very positive for the U.S. dollar and by association, CAD just gets caught in the crossfire like every other currency today ... It's more a broad-brush U.S. dollar strength story."

The Canadian dollar, which still outperformed all major currencies except for the Swedish Kronor, finished its North American session at C$1.0273 to the greenback, or 97.34 U.S. cents. This was firmly weaker than Tuesday's North American close of C$1.0210, or 97.94 U.S. cents.

U.S. Treasuries prices slid following Bernanke's comments, which confirmed worries the days of low interest rates might come to an end sooner than expected.

Canadian government debt tracked the United States, with prices sliding across the maturity curve. The two-year bond gave back 10 Canadian cents to yield 1.164 percent, while the benchmark 10-year bond tumbled 71 Canadian cents to its highest yield since March 2012, at 2.245 percent.

New Bank of Canada governor Stephen Poloz also spoke on Wednesday in his first official speech as head of the bank, but the speech, which did not shed new light on his policy stance, did little to influence markets.

"He stuck to the script from his testimony earlier," said Tulk. "I think he very much wants to use the monetary policy report on July 17 to really leave his impression on the market in terms of how he sees the economy unfolding."

Poloz said the central bank cannot rely on its usual models to assess the economy because of unexpectedly high levels of uncertainty, with the biggest risks coming from abroad.

"Our broad takeaway is that this speech further reinforces our prolonged (rate) pause forecast into 2015," said Scotiabank' economists Derek Holt and Dov Zigler in a research note.

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