CANADA FX DEBT-Loonie weakens amid caution, eyes on Fed

Wed Dec 18, 2013 9:50am EST

* Canadian dollar at C$1.0645 or 93.94 U.S. cents
    * Bond prices lower across the maturity curve

    By Leah Schnurr
    TORONTO, Dec 18 (Reuters) - The Canadian dollar weakened
against the greenback on Wednesday amid investor caution ahead
of a statement from the Federal Reserve later in the day that
could signal the start of the U.S. central bank's withdrawal of
its economic stimulus.
    The Fed will conclude a two-day policy meeting with a
statement at 2:00 p.m. EST (1900 GMT), followed by a news
conference by Chairman Ben Bernanke shortly after.
 
    The Fed is currently buying $85 billion a month in bond
purchases to keep borrowing costs low and boost the economy.
Recent better-than-expected economic data and a budget deal in
Washington has led some investors to believe the Fed may be
comfortable with the idea of trimming its market-friendly bond
purchases sooner rather than later. 
    Markets have been focused on this meeting for weeks and
expectations are divided over whether that reduction will be
announced on Wednesday or if the Fed will hold off until early
next year.
    Anticipation over the meeting overshadowed strong Canadian
wholesale trade numbers. 
    "Considering the fact that everybody has been waiting for
this Fed meeting for quite a while now, it's quite clear that
nothing but the Fed is going to move markets," said Greg Moore,
FX strategist at TD Securities in Toronto.
    While Moore expects Wednesday's meeting might be a little
bit too soon for the Fed to begin tapering, "the fact that quite
a number of market participants are expecting tapering could
happen today means that there will be a pretty sharp reaction in
either case," he said. TD Securities forecasts a Fed decision on
dialing back stimulus at its next meeting in January.
    The Canadian dollar was at C$1.0645 to the
greenback, or 93.94 U.S. cents, weaker than Tuesday's close of
C$1.0610, or 94.25 U.S. cents.
    A faster timetable for withdrawing stimulus is seen as
bearish for the Canadian dollar because it is expected to reduce
appetite for risk and benefit 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.
    If tapering is not announced later on Wednesday, the loonie
could head toward the upper C$1.05 area, said Moore, while a
reduction in asset purchases could see the currency test its
recent lows around C$1.07.
    The Canadian dollar traded as low as C$1.0708 earlier in the
month, its lowest level in 3-1/2 years.
    At home, data showed Canadian wholesale trade jumped in
October as sales in the machinery, equipment and supplies
subsector grew at the fastest rate in a decade. The loonie saw
little reaction to the data. 
    Canadian government bond prices were lower across the
maturity curve, with the two-year down 1-1/2 Canadian
cents to yield 1.116 percent and the benchmark 10-year
 down 27 Canadian cents to yield 2.676 percent.
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