CANADA FX DEBT-Loonie slips as Fed moves scale back stimulus
* Canadian dollar at C$1.0689 vs US$, or 93.55 U.S. cents * Fed announces pullback of quantitative easing program * Bond prices mixed across the maturity curve By Leah Schnurr and Alastair Sharp TORONTO, Dec 18 (Reuters) - The Canadian dollar weakened against the greenback on Wednesday after the U.S. Federal Reserve announced plans to trim its economic stimulus program, which has been a major driver of global markets this year. The central bank said it would reduce its monthly asset purchases by $10 billion to $75 billion, trimming equally from mortgage and Treasury bonds. At the same time, the Fed tried to temper reaction to the move by suggesting its key interest rate would stay low for even longer than previously promised. The Canadian dollar hit a session low following the announcement. It later pared declines before again weakening into the close. The withdrawal of some Fed stimulus - coupled with the Bank of Canada's recent signals that domestic interest rates will not be raised anytime soon - is seen as bearish for the Canadian dollar because it is expected to direct capital flows to the U.S. currency on the expectation of higher returns. "A little bit of a shock to the markets," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary, referring to the fact many economists did not expect the Fed to reduce its stimulus until early next year. "A reduction in stimulus on a global perspective from a liquidity standpoint is going to be a negative for high beta currencies, like the loonie," Smith said, referring to currencies that often show volatility. The Canadian dollar ended the North American session at C$1.0689 to the greenback, or 93.55 U.S. cents, much weaker than Tuesday's close of C$1.0610, or 94.25 U.S. cents. It dropped as low as C$1.0703, its weakest since Dec. 6. The reaction might have been more pronounced if investors hadn't sought in recent weeks to prepare for an eventual reduction. The Fed had suggested for months that a pullback was in the works. "We'd seen U.S. dollar long positions accumulate running into this," said Shaun Osborne, chief currency strategist at TD Securities. "Given that it was a question of 'when' not 'if', it was a case of being prepared for a tapering decision even if the bulk of opinion seemed to think, as we did, that it was going to happen early in 2014." Markets have been focused on December's Fed meeting for weeks and expectations were divided on whether the Fed would taper or not. "The market now has a bit of relief in regards to that we've finally seen a taper," Smith said. "But that being said, as that stimulus is eventually unwound, it's going to continue to put further pressure on the loonie as we go." Canadian government bond prices were mixed across the maturity curve, with the two-year up 1/2 a Canadian cent to yield 1.106 percent and the benchmark 10-year down 30 Canadian cents to yield 2.679 percent.
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