Canadian Dollar Declines as Fed to Start Tapering Bond-Buying

The Canadian dollar posted its biggest drop in eight weeks after the U.S. Federal Reserve announced plans to begin trimming its monthly bond purchases starting in January amid signs of economic acceleration.

The currency fell for a third day versus its U.S. peer after the Fed cited “the cumulative progress toward maximum employment” in deciding to cut buying to $75 billion from $85 billion. Canada’s dollar dropped earlier against most of its major peers after Bank of Canada Governor Stephen Poloz told Bloomberg News yesterday that recent declines in the currency weren’t enough to help exporters.

“The U.S. dollar rose pretty much across the board against all currencies as a result of the move, which means that dollars will be less plentiful in the future, and rate hikes are one step closer,” Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, said by phone from New York. “I continue to see dollar/CAD headed to C$1.09 in three to six months.”

The loonie, as Canada’s dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.9 percent to C$1.0703 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 93.56 U.S. cents.

The currency’s decline stopped just short of the three-year low of C$1.0708 per U.S. dollar level reached Dec. 6. It traded at C$1.0645 before the Fed release.

Bonds, Crude

Canada’s benchmark 10-year government bond fell, with yields rising four basis points or 0.04 percentage points to 2.68 percent. The 1.5 percent security maturing in June 2023 lost 32 cents to C$90.22.

Futures of crude oil, Canada’s largest export, added 0.4 percent to $97.63 per barrel. The Standard & Poor’s 500 Index (SPX) of U.S. stocks rose 1.7 percent to a record 1,810.65 close.

The Fed starting next month will divide its purchases between $40 billion in Treasuries and $35 billion in mortgage bonds.

“If incoming information broadly supports the committee’s expectation of ongoing improvement in labor-market conditions and inflation moving back toward its longer-run objective,” the Federal Open Market Committee said in a statement, “the committee will likely reduce the pace of asset purchases in further measured steps.” The FOMC repeated that purchases are “not on a preset course.”

The Fed left unchanged its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.

Poloz’s View

Poloz cited in an interview yesterday weakness in foreign and domestic demand as the reason why he surprised investors by dropping the bank’s bias to raise interest rates, adding that inflation has been “lower than we can explain.”

“To continue to say, ‘Oh, by the way, interest rates could go up any minute,’ I think it’s being too aggressive,” Poloz said. “Given what we know today, something really unusual would have to happen to get us back to home base in less than two years.”

The Bank of Canada’s forecast is that the economy won’t reach full output until around the end of 2015.

The loonie remained lower today even after Canadian wholesale sales rose the most in three months in October, exceeding the highest forecast of economists on increased machinery receipts.

Sales rose 1.4 percent to a record C$50.5 billion ($47.5 billion), Statistics Canada said today in Ottawa, compared with the median estimate of a 0.3 percent gain in a Bloomberg survey with 13 responses. The most optimistic estimate called for a 0.6 percent increase.

‘Vulnerable’ Loonie

Implied volatility for three-month options on the U.S. dollar against its Canadian peer fell to as low as 6 percent on an intraday basis, the lowest point since Nov. 21. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.7 percent.

“The market was already short CAD, long dollars, running into this, so I’m not too surprised we haven’t seen that much of a selloff,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “The CAD does seem to be one of the more vulnerable currencies, given we’ve got a central bank that’s neutral here at the moment, and maybe leaning towards an easing bias if the data doesn’t pick up.” A short position is a bet an asset will decline in value, while a long one is a wager on an increase.

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.