CANADA FX DEBT-Loonie weakens as market braces for the Fed

Tue Dec 17, 2013 4:42pm EST

* Canadian dollar at C$1.0610 or 94.25 U.S. cents
    * Bond prices up across the maturity curve


    By Leah Schnurr
    TORONTO, Dec 17 (Reuters) - The Canadian dollar weakened
modestly against the greenback on Tuesday as investors placed
their bets on whether the U.S. Federal Reserve would begin
winding down its stimulus program at the conclusion of its
two-day policy meeting this week.
    Flat U.S. consumer prices for November released on Tuesday
did little to sway markets one way or the other after a spate of
recent data that has suggested the U.S. economy is on an
upswing. 
    In Canada, a report showed manufacturing sales jumped in
October on strong sales in the food sector. The loonie's
reaction was muted. 
    The Fed will release a statement at the end of its meeting
on Wednesday and investors will be looking for clear language on
what plans it has for its asset purchase program, with some
seeing the possibility the Fed could begin reducing its $85
billion a month in bond purchases.
    The possibility that the withdrawal of quantitative easing,
or "QE", could start imminently already may have been priced
into the market in recent weeks, said Mark Chandler, head of
Canadian fixed income and currency strategy at Royal Bank of
Canada in Toronto.
    "Today's action may be people just taking some of their
chips off the table," Chandler said.
    The Canadian dollar ended the North American
session at C$1.0610 to the greenback, or 94.25 U.S. cents,
weaker than Monday's close of C$1.0587, or 94.46 U.S. cents.
    If the Fed opts for a faster timetable for withdrawing
stimulus, that is seen as a negative for the Canadian dollar
because it is expected to reduce appetite for risk, thereby
benefiting the U.S. currency. Markets were caught off guard in
September when the Fed decided to hold steady, rather than trim
the program as many had expected.
    "I think there's still somewhere around a 30 percent chance
that they might begin some sort of modest amount of tapering, in
which case we would see the U.S. dollar react positively at the
time," said Don Mikolich, executive director of foreign exchange
sales at CIBC World Markets in Toronto.
    The loonie is likely to trade in the C$1.055 to C$1.0640
range, said Mikolich, though if the Fed does move toward
tapering, the C$1.0735 levels could come back into play. The
Canadian currency traded as low as C$1.0708 earlier in the
month, its lowest level in 3-1/2 years.
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 1.8 Canadian
cents to yield 1.107 percent and the benchmark 10-year
 up 26 Canadian cents to yield 2.643 percent.
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