CANADA FX DEBT-Loonie slips as Fed moves scale back stimulus

Wed Dec 18, 2013 5:00pm EST

* 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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