Canadian Dollar Notches Loss Against US Rival

September 13, 2012 Dow Jones, Wall Street Journal

By KAREN JOHNSON

TORONTO—The Canadian dollar bucked the broader trend in the currency market on Wednesday, declining against the U.S. dollar when most other rivals were rising on a relief rally after Germany’s Constitutional Court upheld the euro zone’s bailout fund.

The greenback was generally under pressure as improved investor sentiment sparked an exit from safe havens and as growing expectations that the Federal Reserve would announce some new stimulus measure on Thursday dented the U.S. dollar’s allure.

Despite that pressure, the U.S. dollar was nonetheless higher against its Canadian rival, trading at C$0.9766 late Wednesday, from C$0.9732 late Tuesday, according to data provider CQG.

The market has been widely expecting Fed’s policy-setting body, the Federal Open Markets Committee, to announce a third, giant bond-buying program, known as quantitative easing, when its two-day meeting concludes Thursday afternoon. They also expect the Fed to commit to holding interest rates near zero even longer than previously pledged, into 2015. Both measures would generally be considered negatives for the U.S. dollar.

A day ahead of the announcement, however, some investors were positioning for a U.S. dollar rally in case the Fed disappoints, or if some new harsh language about the U.S. recovery sparks a move into safe-havens, or if a “buy the rumor, sell the fact” mentality pushes the U.S. dollar higher. Some of those investors were selling loonies to snap up greenbacks, and that was contributing to a USD/CAD rally.

“Everyone wants to find a cheap way — a low-risk way — of getting long [U.S.] dollars ahead of the announcement tomorrow from the FOMC,” said Mark Frey, vice president and chief market strategist at Cambridge Mercantile Group Corporate.

Analysts said the Canadian dollar’s weakness against the U.S. dollar was also in part the result of a spillover effect, as investors sold the loonie to pick up other rivals — notably the euro and the Australian dollar.

The German court’s ruling, with only a limited condition, had many investors reversing their bearish euro positions, and selling its rivals, including the Canadian dollar.

“Some of the Canadian dollar’s bullish view is going to be eroded simply by virtue of unwinding euro trades,” said Jack Spitz, managing director of foreign exchange, financial markets and derivatives at National Bank in Toronto.

The Antipodean currencies, meanwhile, were benefiting from Europe’s relief rally, but also from Chinese Premier Wen Jiabao’s comments overnight that China has ample room for more stimulus if needed to meet stated growth targets. Those comments gave a boost to currencies closely tied to Chinese consumption.

The Australian dollar gained 0.4% against the Canadian dollar, to trade at C$1.0196. The New Zealand dollar, meanwhile, was up 0.3%, at C$0.7978.

Write to Karen Johnson at karen.johnson@dowjones.com