C$ firms on Bank of Canada rethink; Fed meeting awaited

December 16, 2013 Reuters 0 Comments

December 13, 2013

By: Leah Schnurr

TORONTO, (Reuters) – The Canadian dollar strengthened against the greenback in choppy trading on Friday as investors were encouraged that recent comments from the Bank of Canada were not as dovish as some had anticipated.

Market attention was also focused on next week’s two-day meeting of the U.S. Federal Reserve and whether the central bank will decide to start winding down its economic stimulus, which has been a major driver of global markets this year.

At home, Bank of Canada Governor Stephen Poloz on Thursday said the central bank is likely to keep interest rates on hold “for quite some time,” dampening talk that it was edging closer to cutting rates in order to combat low inflation.

The perception that the Bank of Canada is becoming more dovish has weighed on the loonie since late October when the central bank dropped its long-held rate hike bias. Since then, the Canadian currency has lost about 3 percent.

Poloz on Thursday called that policy change a shift to honesty rather than dovishness.

“He probably wasn’t as dovish as some people were expecting, (and) again highlighted the neutrality of the Bank of Canada,” said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.

“That’s taking some of the pressure off the Canadian dollar, although the Fed next week is still going to be the main focus.”

The Canadian dollar ended the North American session at C$1.0595 to the greenback, or 94.38 U.S. cents, stronger than Thursday’s close at C$1.0640, or 93.98 U.S. cents.

The loonie was also stronger against most other major currencies, including the pound and the euro. Markets will remain fixated on what the Fed will decide at its meeting on Tuesday and Wednesday, its last policy meeting of the year. Investors are trying to gauge whether the central bank will start to scale back its bond purchases next week or hold off until the new year.

Recent stronger-than-expected economic data and a budget deal in Washington have increased speculation tapering could get under way next week. The Fed is currently buying $85 billion in bonds a month.

A faster timetable for the Fed is seen as a negative for the Canadian dollar as it is expected to reduce risk appetite and benefit the U.S. currency.

The loonie should see a range of the mid-C$1.05 level to C$1.0630 heading into the Fed statement, while C$1.07 will be the level to watch if the Fed does trim its bond purchases, Smith said.

Canadian government bond prices were mixed across the maturity curve, with the two-year off 1 Canadian cent to yield 1.104 percent and the benchmark 10-year up 2 Canadian cents to yield 2.664 percent.