Reuters: US Dollar Report: CANADA FX DEBT-C$ hits 2-month high after Fed's new bond-buying

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CANADA FX DEBT-C$ hits 2-month high after Fed's new bond-buying Dec 12th 2012, 21:09 Wed Dec 12, 2012 4:09pm EST * C$ closes at C$0.9849 to US$, or $1.0153 * C$ hits two-month high of C$0.9827, or $1.0176 * Fed announces new bond-buying program; rate unchanged * Bond prices fall across curve By Solarina Ho TORONTO, Dec 12 (Reuters) - The Canadian dollar touched its strongest level against the U.S. dollar in nearly two months on Wednesday after the U.S. Federal Reserve announced a new round of bond purchases to stimulate the economy. The Fed committed to monthly purchases of $45 billion in Treasuries on top of the $40 billion a month in mortgage-backed bonds the U.S. central bank started buying in September. The action comes ahead of the year-end expiration of its "Operation Twist" program, under which the Fed has been buying $45 billion in longer-term Treasuries with proceeds from the sale of short-term debt. "It was exactly what we thought they would do. I think that the currency market reacted because some may have thought that they wouldn't have rolled over all of what they were doing under the Twist buying into quantitative easing," said Avery Shenfeld, chief economist at CIBC World Markets. "There are market participants who view quantitative easing as having a negative impact on the U.S. dollar, but positive for other currencies," Shenfeld added. At 3:37 p.m. EST (2037 GMT), the Canadian dollar was trading at C$0.9849 to the greenback, or $1.0153, stronger than Tuesday's North American close of C$0.9862, or $1.0140. Shortly after the Fed's announcement at 12:30 p.m., the currency firmed to an eight-week high against the greenback of C$0.9827, or $1.0176, but pared back to pre-announcement levels during the press conference by Fed chief Ben Bernanke. "It may not be because of what Bernanke is saying, it may be just second thoughts on really whether any of this is that material to the U.S. dollar exchange rate," said Shenfeld. The Fed on Wednesday also took the unprecedented step to keep rates steady until the U.S. unemployment rate falls to 6.5 percent and as long as inflation was projected to be no more than 2.5 percent one or two years ahead and inflation expectations were contained. The Canadian dollar's performance was mixed against major currencies. It outperformed the Japanese yen and soared to its strongest level in about 8-1/2 months. The struggling yen was pressured by bets the Bank of Japan will take more aggressive easing steps after a likely victory of the Liberal Democratic Party in the country's election on Sunday. The Canadian dollar underperformed the euro, the British pound and fellow commodities-linked currencies including the Australian dollar. It touched a 9-1/2-month low against the New Zealand dollar. "I think all of these reactions will be short-lived into year-end, which would be consistent with the view that monetary policy is having incrementally less and less influence at the margin versus other more dominant and sustained influences," said Scotiabank economists Derek Holt and Dov Zigler in a research note, adding that the chief risk toward the end of this year is the U.S. fiscal crisis. Canadian government debt prices were lower across the curve, tracking U.S. Treasuries, where yields rose after the Fed statement at the close of the meeting of its policy-setting Federal Open Market Committee. "The impact of the FOMC statement has been to push Treasury yields higher and steepen the curve, while equities are gathering momentum and inflation break-evens are slightly lower than pre-statement," Richard Gilhooly, interest rate strategist at TD Securities, said in a note. "There are a lot of moving parts to what the Fed has announced." The two-year bond slipped 3 Canadian cents to yield 1.092 percent, while the benchmark 10-year bond gave back 24 Canadian cents to yield 1.755 percent. Link this Share this Digg this Email Reprints

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