Bloomberg News

Canadian Dollar Weakens as Fed Refrains From Further Stimulus

August 01, 2012

Canada’s dollar fell against its U.S. counterpart after the Federal Reserve’s pledge to provide additional support for the economy disappointed investors anticipating a more definitive sign of further monetary easing.

The Federal Open Market Committee reiterated in a statement it will keep interest rates exceptionally low at least through late 2014 and will provide additional accommodation as needed. Investors had speculated the central bank might signal a third round of asset purchases under quantitative easing.

“The U.S. dollar has reacted in a meaningful way and it’s a dollar bid,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said in a telephone interview. “Certain doves were expecting a little more accommodation.”

Canada’s currency fell 0.3 percent to C$1.0055 per U.S. dollar at 5 p.m. in Toronto. It earlier rose to almost the strongest since May 15, the last time the currency traded on a one-for-one basis with the greenback. One Canadian dollar buys 99.45 cents.

The Standard & Poor’s 500 index swung to a 0.3 percent decline after adding 0.4 percent.

“Owning the U.S. dollar here is a good risk-reward trade with the event risk,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal, wrote in an e- mail before the Fed’s policy statement, referring to the European Central Bank meeting tomorrow and the U.S. nonfarm payrolls report Aug. 3.

Growth Falters

Fed Chairman Ben S. Bernanke held off on stepping up record stimulus even as consumer spending flagged, economic growth slowed and unemployment persisted at 8.2 percent.

Canada’s currency has appreciated 2.5 percent this year against nine major counterparts tracked by Bloomberg Correlation-Weighted Indexes on speculation policy makers will extend measures to stimulate economic growth as evidence mounts the global recovery is stalling. Only the fellow resource-linked dollars of Australia, up 3.5 percent, and New Zealand up 5.2 percent, have done better in 2012.

Gains in commodity currencies have occurred amid a 10 percent drop this year in crude oil, Canada’s largest export, and a 2 percent drop in the Thomson Reuters/Jefferies CRB Index of 19 commodities.

Canadian government bonds fell for the first time in three days, sending the benchmark 10-year yield up three basis points, or 0.03 percentage point, to 1.71 percent. The price of the 2.75 percent securities due in June 2022 dropped 31 cents to C$109.40.

Concern that Europe’s debt crisis is hampering economic growth in China and the U.S., the world’s two largest economies, has stoked demand for those assets investors perceive as safer. Government bond yields reached 1.34 percent on June 1, the lowest since at least 1989, according to the Bank of America Merrill Lynch Canadian Governments Index, which tracks 36 bonds with an average maturity of 8.74 years and about C$361 billion outstanding. Yields ended yesterday at 1.49 percent.

Canada sold C$3.3 billion ($3.3 billion) of two-year bonds today in Ottawa. The 1 percent bonds maturing in November 2014 fetched an average yield of 1.147 percent.

The coverage ratio, the amount bid relative to the amount on offer, was 2.55 times. That compares with an average yield of 1.114 percent and a coverage ratio of 2.41 times at the previous two-year auction on June 20.

Bond Auction

The Canadian dollar and the euro pared gains earlier today after Bundesbank President Jens Weidmann said the ECB shouldn’t exceed its mandate. Tomorrow’s interest-rate decision is the first since President Mario Draghi pledged to do whatever it takes to defend the single currency.

The Fed bought $2.3 trillion of securities in two rounds of asset purchases from 2008 to 2011 in a bid to spur growth, and it has said its benchmark interest rate will stay at “exceptionally low levels” at least through late 2014.

Twenty-six percent of economists surveyed before today’s statement expected the central bank to extend its pledge to hold its main interest rate near zero beyond the current horizon of late 2014, while 88 percent said the bank will refrain from starting new purchases at today’s meeting.

“The markets have gotten ahead of themselves in thinking the Fed can do or will do more today,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, in a telephone interview before the Fed’s statement. “We’re a little bit negative in the sense of the implications for markets because we really don’t think the Fed or the ECB can or will do much to satisfy the kind of expectations that are built up regarding these meetings.”

To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Katia Dmitrieva in New York at edmitrieva1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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