CANADA FX DEBT-Loonie weakens from 3-month high as Fed move assessed

Thu Sep 19, 2013 5:03pm EDT

* C$ at C$1.0262 against U.S. currency
    * Fed remains primary focus after holds purchases steady
    * Canadian bond prices mixed across the curve


    By Leah Schnurr
    TORONTO, Sept 19 (Reuters) - The Canadian dollar weakened on
Thursday, pulling back from a three-month high as investors
tried to gauge how long the U.S. central bank will keep its
stimulus program in place the day after it defied market
expectations by keeping policy steady.
    The U.S. Federal Reserve maintained its $85 billion a month
in bond purchases in a decision on Wednesday, surprising
investors who had largely expected a small reduction of about
$10 billion. 
    The Fed also cut its projections for economic growth for
both this year and next. The Canadian dollar surged in the wake
of the announcement and touched a fresh three-month high of
C$1.0182 in early Thursday trading.
    But the dollar gave up that strength to end the day weaker.
With the United States as Canada's biggest trading partner, the
Fed's lower economic forecast could dampen investor enthusiasm
for the loonie. 
    "The flip side for the Canadian dollar is that our economic
recovery is highly tied to the U.S., so a more downbeat forecast
on future economic growth from the Fed isn't really a good thing
for the Canadian economy," said Scott Smith, senior market
analyst at Cambridge Mercantile Group in Calgary.
    "We're in this range where investors and traders are really
trying to decipher whether or not this gives us impetus to take
another leg lower from here or if we have to stand back and
reassess the situation."
    The Canadian dollar ended at C$1.0262 to the U.S.
dollar, or 97.45 U.S. cents, weaker than Wednesday's session
close of C$1.0222, or 97.83 U.S. cents. 
    Still, in the long term, continued quantitative easing from
the Fed should be a positive for the Canadian dollar, said Adam
Button, currency analyst at ForexLive.
    "We're seeing a dip in the Canadian dollar today but it
won't last," said Button.
    "The Fed now will continue to flood the market with cheap
liquidity ... and it will boost asset prices and commodity
prices, and inevitably that's going to be good news for the
Canadian dollar."
    Reaction to Thursday's domestic economic data was subdued as
a stronger-than-expected 1.5 percent rise in wholesale trade in
July was offset by a downward revision to the previous month's
figures. 
    Prices for Canadian government bonds were mixed across the
maturity curve, with the two-year bond up 2 and a
half Canadian cents to yield 1.251 percent, and the benchmark
10-year bond off 19 Canadian cents to yield 2.709
percent.
FILED UNDER: