Canada’s dollar trades at almost 3-year low on Fed taper bets

December 9, 2013 09:26 AM

The Canadian dollar traded at almost a three-year low amid speculation Federal Reserve officials may signal the central bank will slow its monetary stimulus program as soon as next week.

The currency weakened against most of its major peers as data showed the pace of Canadian new-home construction slowed in November. St. Louis Fed President James Bullard said in a speech the odds of slowing the central bank’s $85 billion of monthly bond-buying have risen, and Dallas Fed President Richard Fisher said tapering the purchases needs to begin soon and done on a “well-defined calendar.”

“The Fed calls for tapering sooner are strengthening the dollar across the board,” said Chris Gaffney, co-chief investment officer at EverBank Wealth Management, by phone from St. Louis. “It’s wait and see, as with most of the markets, but with a bias toward selling.”

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$1.0643 per U.S. dollar at 2:40 p.m. in Toronto after falling as much as 0.3%. It touched C$1.0708 on Dec. 6, the weakest since May 2010. One loonie buys 93.95 U.S. cents.

Futures on crude oil, Canada’s largest export, fell 0.3% to $97.41 a barrel in New York after six days of gains. The Standard & Poor’s 500 Index of U.S. stocks rose 0.2%.

Bonds Rise

Canada’s benchmark 10-year government bond gained, with yields falling one basis point, or 0.01 percentage point, to 2.67%. The 1.5% security maturing in June 2023 added 12 cents to C$90.25.

The cost to insure against declines in the loonie versus its U.S. counterpart fell to the lowest in three weeks, with the three-month 25-delta risk-reversal rate dropping to 1.10%. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

The share of economists predicting the Fed will reduce bond buying in December doubled after a government report showed U.S. employers added 203,000 jobs last month and the unemployment rate reached a five-year low of 7%..

The Federal Open Market Committee will probably begin reducing monthly bond purchases at a Dec. 17-18 meeting, according to 34% of economists surveyed Dec. 6 by Bloomberg, an increase from 17% in a Nov. 8 survey. In November, 53% predicted a tapering in March, compared with 40% in yesterday’s poll of 35 economists.

‘Higher Yield’

Interest rates in the U.S. will likely rise as the bond purchases slow, increasing the allure of the U.S. dollar versus its peers.

“We know we’re approaching that all-important taper, and I think the market is reacclimatizing -- the Canadian dollar was so overbought,” said Eimear Daly, a currency market analyst at Monex Europe Ltd., by phone from London. “Basically people are just moving out of CAD and moving back into USD because the Canadian dollar is losing that higher yield advantage.”

Canadian housing starts were 192,235 at a seasonally adjusted annual pace in November, Ottawa-based Canada Mortgage & Housing Corp. said on its website today. That’s down from a revised 198,200 the prior month, and compares with the 195,000 estimate by 13 economists in a Bloomberg survey.

The Canadian dollar has declined 4.3% this year against nine developed market currencies tracked by the Bloomberg Correlation Weighted Index. The other currencies that have lost value are the Australian dollar, the yen and the Norwegian krone. The U.S. dollar has gained 3.4%.

Greenback Bid

“With payrolls being plus-200,000 last Friday, the bar has been raised on the 18th of December for the start of tapering,” Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “It will put a bid to the U.S. dollar across the board. And, for Canada, it consolidates the bid against the Canadian dollar.”

The St. Louis Fed’s Bullard, who votes on Fed policy this year, said a reduction in bond purchases should be modest because inflation is low. He spoke in St. Louis.

Fisher spoke in Chicago.

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