CANADA FX DEBT-C$ hits 3-1/2-year low in wake of Fed pullback

Thu Dec 19, 2013 9:51am EST

* Canadian dollar at C$1.0703 or 93.43 U.S. cents
    * Loonie trades at lowest level since 2010 in overnight
session
    * Bond prices lower across the maturity curve

    By Leah Schnurr
    TORONTO, Dec 19 (Reuters) - The Canadian dollar touched a
new 3-1/2-year low against the greenback on Thursday as
investors dumped the currency in the wake of the U.S. Federal
Reserve's decision to start scaling back its massive economic
stimulus program.
    The Fed on Wednesday announced it will modestly trim the
amount of its quantitative easing, known as "QE", which has been
a significant driver of global markets across assets this year.
    Still, 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 reduction in Fed bond-buying is seen as a negative for
the Canadian dollar because it is expected to direct capital
flows to the U.S. currency on the expectation of higher returns.
    The Canadian dollar has also been hit by a recent more
dovish shift from the Bank of Canada, which has analysts
expecting that interest rates at home will stay low for longer. 
    "The bearish sentiment on the loonie is pretty prevalent, so
we wouldn't be surprised to see continuing weakness," said
Benjamin Reitzes, senior economist at BMO Capital Markets in
Toronto.
    The Canadian dollar was at C$1.0703 to the
greenback, or 93.43 U.S. cents, weaker than Wednesday's close of
C$1.0689, or 93.55 U.S. cents.
    The loonie traded as far as C$1.0728 in the overnight
session, its lowest level since May 2010. Analysts expect there
to be technical support around the C$1.07 level.
    Some investors took the Fed's move as a sign the U.S.
economic recovery is finally strong enough for the central bank
to start withdrawing. A stronger economy south of the border
should ultimately benefit Canada, which relies on the United
States for trade.
    Even so, expectations that the Bank of Canada will remain on
the sidelines, as well as the ongoing pullback of the Fed's
stimulus, will likely continue to weigh on the Canadian dollar,
said Reitzes.
    "The (economic) numbers for October in Canada have been
pretty good so far, we could get a pretty decent October GDP
report that could provide a little bit of support next week in
thin markets," said Reitzes.
    "But going forward, as the Fed still dominates markets and
market psychology, it's going to be difficult for the Canadian
dollar to really gain any meaningful traction."
    Canadian government bond prices were lower across the
maturity curve, with the two-year down 7 Canadian
cents to yield 1.139 percent and the benchmark 10-year
 down 24 Canadian cents to yield 2.710 percent.
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