Canadian Dollar Falls As Fed Favors QE3 Ending This Year

The Canadian dollar fell the most in almost two weeks against its U.S. counterpart after the U.S. central bank revealed it may end monetary stimulus as early as this year, allowing the currency to appreciate.

The loonie, as the currency is nicknamed, strengthened against the euro and most of its other major peers before government reports tomorrow from Canada and the U.S. on December employment. The Federal Reserve will probably end its $85 billion monthly bond purchases sometime in 2013, with members divided between a mid- or end-of-year finish, the record of the Federal Open Market Committee’s Dec. 11-12 gathering show.

“Markets thought quantitative easing would last much longer than that and as a result less stimulus tends to mean a stronger U.S. dollar,” said Eric Lascelles, chief economist at Royal Bank of Canada’s RBC Global Asset Management unit, said by phone from Toronto. “The Canadian dollar ends up weaker just because the U.S. dollar is stronger on less stimulus expectations.”

The loonie fell 0.3 percent to 98.78 cents per U.S. dollar at 5:04 p.m. in Toronto, its largest drop since Dec. 21. Yesterday, it rose to the highest level since Dec. 18. It added 0.8 percent to C$1.2891 per euro. One Canadian dollar buys $1.0124.

Oil, Stocks

Futures on crude oil, the country’s biggest export, fell 0.3 percent to $92.85 per barrel. The Standard & Poor’s 500 Index was down 0.2 percent.

Implied volatility for three-month options on the U.S. dollar versus the loonie was 5.5 percent, the least since Dec. 21 and below the one-year average of 7.7 percent. Implied volatility signals the expected pace of currency swings and is quoted and used by traders to set option prices.

Canada’s benchmark 10-year bonds declined, with yields rising six basis points, or 0.06 percentage point, to 1.95 percent. The 2.75 percent security maturing in June 2022 fell 50 cents to C$107.08.

The Bank of Canada said it will sell C$3.4 billion ($3.4 billion of five-year notes on Jan. 9. The 1.25 percent securities will mature in March 2018.

Canada’s unemployment rate is expected to have increased in December to 7.3 percent from 7.2 percent the previous month, according to a Bloomberg survey of 22 economists. Jobs growth may have slowed to 5,000 from 59,300 the previous month, a separate survey shows.

Jobs Data

Hiring is expected to have picked up in the U.S. in Dec. with 153,000 jobs added, compared with 146,000 the previous month, according to the median estimate of a survey of 76 economists by Bloomberg. The jobless rate is forecast to be unchanged at 7.7 percent.

Canada’s dollar strengthened earlier as data from Roseland, New Jersey-based ADP Research Institute showed U.S. companies added 215,000 workers in December, compared with the 140,000 job gain predicted in a Bloomberg survey.

“The Canadian dollar has really taken its cue off the ADP employment change, and it’s probably going to start strengthening off expectations for positive nonfarm payrolls tomorrow,” Eimear Daly, a currency market analyst at Monex Europe Ltd., said by phone from London.

The U.S. Congress will face a debate about raising the country’s $16.4 trillion debt ceiling next month and must confront $110 billion in automatic spending cuts in March that were put off in this week’s budget deal. Republican politicians have promised to use the debate on raising the nation’s borrowing limit to win concessions on spending cuts.

Big Move

“We had such a big move in the Canadian dollar yesterday, and all risk assets yesterday, that it’s really hard to see that move extended right now,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, by phone from Toronto. “Especially with the one-day move after the fiscal cliff and there’s still a number of issues looming in the next couple of months, so I think the enthusiasm for risk assets is dissipated after yesterday.”

The Canadian dollar has gained 1.3 percent in the past week versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The greenback has added 0.3 percent.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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