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Canadian Dollar Trades at Almost 3-Year Low on Rate Speculation

The Canadian dollar traded at an almost three-year low after Bank of Canada Governor Stephen Poloz said interest rates would not change for “quite some time” amid speculation the Federal Reserve will slow stimulus.

The currency fluctuated against its U.S. peer as the interest rate advantage of Canada’s two-year bonds compared with U.S. counterparts dropped to 77 basis points, the narrowest spread since Sept. 4, limiting the relative appeal of the Canadian dollar-denominated debt. U.S. policy makers meet on Dec. 17-18 amid speculation the Federal Open Market Committee will slow bond purchases used to keep borrowing rates low.

“We’ve seen some gradual erosion in short-term yields, between Canada and the U.S. which may add some more short-term pressure on the Canadian dollar,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “From a broader point of view it’s probably about the FOMC and the tapering bet that’s supporting the dollar.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, was little changed at C$1.06638 per U.S. dollar at 108:13 a.m. in Toronto. One loonie buys 94 U.S. cents.

The withdrawal of stimulus by the U.S. is seen weighing on markets worldwide, which have been bolstered by the Fed policy goal of keeping borrowing rates low to spur economic growth.

The currency of Canada’s commodity-exporting peer Australia fell yesterday after central-bank Governor Glenn Stevens signaled a weaker local currency is preferable to lower interest rates to spur the economy, saying the Aussie’s natural level is probably closer to 85 U.S. cents.

“If you look at when the price took off in dollar/CAD it was directly linked to when Mr. Stevens comments came out, he put a target to Aussie/U.S., and commodity currencies in general were swept up in that, the Canadian dollar being one of them,” said Brad Schruder, director of foreign exchange at Bank of Montreal, by phone from Toronto. “In general, it’s a commodity currency reaction.”

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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