CANADA FX DEBT-C$ touches 4-1/2-year low as emerging markets steady

Tue Jan 28, 2014 4:41pm EST

* Canadian dollar at C$1.1156 or 89.64 U.S. cents
    * Bond prices higher across the maturity curve


    By Leah Schnurr
    TORONTO, Jan 28 (Reuters) - The Canadian dollar touched a
4-1/2-year low against the greenback on Tuesday as a
stabilization in emerging markets drew investors' focus back to
the loonie's weak outlook.
    Markets were also positioning ahead of the Federal Reserve's
policy decision at the close of its two-day meeting on
Wednesday, with expectations the U.S. central bank will announce
a further reduction in its bond-buying. A faster timeline for
unwinding the Fed's economic stimulus program is seen supporting
the U.S. dollar, to the detriment of the loonie.
    A policy shift from the Bank of Canada late last year has
weighed on the loonie in recent months and has fueled market
expectations that interest rates will stay low for some time.
Selling intensified last week after the central bank left the
door open to a rate cut. 
    Recent comments from the central bank that the Canadian
dollar was still strong and that its strength still posed an
obstacle to exports have added pressure to the currency.
    The Canadian dollar got a respite late last week after a
sell-off in emerging markets gave the loonie some safe-haven
appeal. But as those markets steadied on Wednesday, the Canadian
dollar was out of favor again. 
    "The overall Canadian dollar story is still very much
favoring the bearish side," said Camilla Sutton, chief currency
strategist at Scotiabank in Toronto.
    "All in all, what we're seeing is a retracement of the risk
aversion move, so as we've had the prospects for the emerging
markets stabilize a little bit, what it also does is it then in
turn allows the Canadian dollar to go back to where it was." 
    An unexpected drop in durable goods orders in December south
of the border also weighed on the Canadian dollar, Sutton said.
Analysts are looking for a pickup in the U.S. economic recovery
this year to eventually lend some strength to Canada's economy.
 
    The Canadian dollar ended the North American
session at C$1.1156 to the greenback, or 89.64 U.S. cents,
weaker than Monday's close of C$1.1112, or 89.99 U.S. cents. The
loonie touched a session low of C$1.1177, its lowest level since
July 2009.
    Markets expect the Fed at this week's meeting to trim
another $10 billion a month from its bond-buying program, which
would leave its monthly purchases at $65 billion a month.
 
    With that expectation already priced in, investors could
choose to "sell the fact" after the Fed announcement, said Tony
Valente, senior FX dealer for global treasury solutions at
AscendantFX in Toronto. 
    "I can't see the U.S. dollar getting too much stronger on
that move because everyone is expecting them to taper," Valente
said. 
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 2-1/2 Canadian
cents to yield 0.970 percent and the benchmark 10-year
 up 8 Canadian cents to yield 2.417 percent.
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