C$ firms but market focus stays on Fed policy

December 16, 2013 Reuters 0 Comments

By Leah Schnurr

December 9, 2013

TORONTO, (Reuters) – The Canadian dollar firmed against the greenback on Monday, recovering some ground after its recent rout, but it was seen as unlikely to make any big moves until investors get more clarity on the path of monetary policy in the United States.

The loonie touched a 3-1/2-year low last week, undermined by a number of bearish factors, including a more dovish Bank of Canada, weaker oil prices and uncertainty about when the U.S. Federal Reserve will start winding down its bond-buying program.

While the Canadian dollar got a reprieve on Monday as investors consolidated positions, the market will lack catalysts until next week’s meeting of Fed policymakers.

“We’re going to have a hard time this week really making any large, sustained moves,” said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.

That should leave the Canadian dollar trading between C$1.06 and C$1.07, Smith said. The currency traded as weak as C$1.0708 last week, its lowest level since May 2010.

The Canadian dollar ended the North American session at C$1.0635 to the greenback, or 94.03 U.S. cents, stronger than Friday’s close of C$1.0656, or 93.84 U.S. cents.

Last week’s better-than-expected jobs data in the United States has supported expectations the Fed could start tapering its stimulative bond-buying program sooner rather than later.

“I still think the Federal Reserve is going to want a couple more employment reports like that before they do taper (but) there definitely is a risk we do see a small, token taper in December,” Smith said.

A Reuters poll showed economists expect the Fed to start reducing its quantitative easing program in March, though some are warming up to the idea that the central bank will do so as early as this month or in January.

A faster timetable for the Fed to reduce its $85 billion a month in bond purchases is seen as bearish for the Canadian dollar as the move is expected to reduce risk appetite and benefit the U.S. currency.

On the domestic front on Monday, data showed new homebuilding in Canada slowed slightly in November, though the loonie had little reaction to the data.

Canadian government bond prices rose across the maturity curve, with the two-year up 2.3 Canadian cents to yield 1.083 percent and the benchmark 10-year up 16 Canadian cents to yield 2.670 percent.