C$ strengthens after last week's rout, Fed eyed

October 31, 2013 Reuters 0 Comments

By: Leah Schnurr

October 28, 2013

TORONTO, (Reuters) – The Canadian dollar strengthened slightly against the greenback on Monday, recovering some of its recent sharp drop, and as investors stayed cautious ahead of a meeting of Federal Reserve policymakers later this week.

The “loonie” hit a 1-1/2-month low on Friday, shedding 1.6 percent for the week in the wake of a policy shift from the Bank of Canada.

Highlighting weaker-than-expected growth and inflation, the central bank dropped any mention of eventual rate increases from its latest policy statement, leading to expectations among analysts that rates will stay low for longer.

The central bank has kept its key rate at 1 percent since 2010, and analysts said the removal of its rate-rise bias gives its policy stance a more neutral tone.

Investors also had their focus on the Federal Reserve’s two-day meeting, starting on Tuesday, though the U.S. central bank was expected to hold the line on its economic stimulus efforts.

The Fed surprised markets in September with its decision to continue its bond-buying program at a $85 billion a month pace, rather than trimming the amount. The Canadian dollar touched a three-month high following that announcement but has weakened since.

“We’re basically just consolidating after last week,” said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.

“The change in the Bank of Canada stance on interest rates and the outlook for monetary policy in Canada has really trumped that risk-on atmosphere in the ‘loonie’ that we got from the delay in tapering.”

The Canadian dollar was at C$1.0448 versus the greenback, or 95.71 U.S. cents, stronger than Friday’s close of C$1.0455, or 95.65 U.S. cents.

Baring any surprises, the Canada dollar is likely to trade in a range between the low C$1.05 area and the high C$1.03 levels, said Smith.

Also on the horizon this week is Canadian gross domestic product for August, due on Thursday.

Canadian government bond prices were mixed across the maturity curve. The two-year bond was up 1 Canadian cent to yield 1.083 percent, and the benchmark 10-year bond slipped 3 Canadian cents to yield 2.425 percent.