CANADA FX DEBT-C$ loses ground as risk appetite wanes

Mon Jan 27, 2014 4:40pm EST

* Canadian dollar at C$1.1112 or 89.99 U.S. cents
    * Bond prices lower across the maturity curve


    By Leah Schnurr
    TORONTO, Jan 27 (Reuters) - The Canadian dollar weakened
against the greenback on Monday, giving up early gains as it got
caught in a flight from riskier assets sparked by the continuing
investor retreat from emerging markets.
    A combination of country-specific problems and expectations
that the U.S. Federal Reserve will scale back its economic
stimulus program kept pressure on emerging markets in a selloff
that started last week.
    The emerging-market concerns also weighed on equities and
oil prices, while supporting the U.S. dollar. The search for
safer assets had earlier boosted the loonie's appeal, but that
did not last through the session.
    "I think the emerging markets conditions and what sort of
contagion that might have to other areas is weighing on
currencies like Canada," said Don Mikolich, executive director
of foreign exchange sales at CIBC World Markets in Toronto.
    "Initially overnight, the Canadian dollar may have been a
bit of a beneficiary of those flows, but as the day's gone on
here, with no other Canada-centric information out there ... the
Canadian dollar has been lumped in with the rest of it." 
    The Canadian dollar ended the North American
session at C$1.1112 to the greenback, or 89.99 U.S. cents,
weaker than Friday's close of C$1.1073, or 90.31 U.S. cents.
    The currency, which has come under pressure in recent
months, touched a 4-1/2-year low last week after dovish comments
from the Bank of Canada.
    Investor focus was turning toward the Fed's policy-setting
meeting later this week. Markets are positioning for the Fed to
reduce its stimulative bond-buying program by another $10
billion a month, bringing it to $65 billion a month.
 
    "Anything in terms of differentiating from that, we'll
definitely see currencies move, so if they decide to pull off
more than the $10 billion, we'll see the U.S. dollar gain
strength," said Scott Smith, senior market analyst at Cambridge
Mercantile Group in Calgary.
    The loonie will likely be capped around C$1.10 in the
short-term, though a surprise from the Fed could see it
strengthen to the mid-C$1.09 area, said Smith. On the downside,
the currency should find a floor at last week's lows around
C$1.1173 to C$1.1175, he said.
    The Canadian economic calendar is light except for gross
domestic product figures for November, due out on Friday.
 
    Canadian government bond prices were lower across the
maturity curve, with the two-year down 5 Canadian
cents to yield 0.993 percent and the benchmark 10-year
 down 29 Canadian cents to yield 2.437 percent.
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