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Canada Dollar Falls After Hitting 3-Month High on Fed Surprise

Canada’s dollar fell from a three-month high as traders bet the currency had moved too far, too fast after slower U.S. growth prompted the Federal Reserve to unexpectedly maintain monetary stimulus yesterday.

The currency erased gains versus its U.S. peer after breaching its 200-day moving average for a second day, a key test for some traders on whether the run of strength has momentum. U.S. government debt rallied yesterday as the Fed maintained its $85 billion in monthly asset purchases, sending borrowing costs down and widening the interest-rate gap between Canadian and U.S. two-year government debt to the most since January. Economists in a Bloomberg survey had forecast the Fed to cut $5 billion from its purchases.

“The Fed move does shift things and it will change our outlook for the Canadian dollar a little bit higher longer-term -- it will basically push out our forecast for a lower Canadian dollar,” Greg T. Moore, a currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “But I think the severity of the move may not be much more than we’ve already seen.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.4 percentage point to C$1.0265 per U.S. dollar at 5 p.m. in Toronto, after earlier touching C$1.0182, the strongest since June 19. One loonie buys 97.41 U.S. cents. The currency’s 200-day moving average was C$1.0212.

Yield Gap

Canada’s benchmark 10-year bonds fell, with yields rising three basis points, or 0.03 percentage point, to 2.71 percent. The 1.5 percent security maturing in June 2023 dropped 23 cents to C$89.87.

Declines in Canada’s two-year bond yields, generally more closely linked with short-term interest rate expectations, could not keep up with the drop in U.S. yields, widening the interest-rate premium on Canada’s securities to 92 basis points, the most since Jan. 21.

Canadian two-year notes yielded 1.25 percent while their U.S. peers offered 0.33 percent.

Futures on crude oil, Canada’s largest export, fell 1.8 percent to $106.28 per barrel and the Standard & Poor’s 500 Index of U.S. stocks dropped 0.2 percent after touching a record high yesterday.

‘Better Levels’

The currency’s failure to stay above the 200-day moving average today was due to Canadian companies that do business across the border taking the opportunity “to buy U.S. dollars at better levels than they’ve seen in three months,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada.

“The 200-day is something that needs to be sustainably breached for a day or two, and we need to see a close below the 200-day as it applies as a momentum indicator,” Spitz said by phone from Toronto.

Canada’s currency fell from a technical level that suggested a drop was in store. The loonie’s seven-day relative-strength index versus the greenback was at 67.4, down from 82.6 yesterday, above the 70 level some traders consider a sign an asset has moved too much, too quickly, and is about to change direction.

“After the moves we’ve seen in the last 24 hours, there’s always a little bit of a scope for a pause for breath,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, said by phone from London. “It’s probably a good opportunity to take a little bit of profit and pause for breath as markets recalibrate after the Fed surprise.”

Stretch said his forecast for the loonie to fall to C$1.06 per U.S. dollar by year end may need to be revised to reflect a stronger Canadian currency.

The loonie, has fallen 1.7 percent this year against nine developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar has gained 2.1 percent.

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