August 24, 2012 / 8:38 PM / in 5 years

Canadian dollar firms on euro zone hopes, Fed in focus

TORONTO (Reuters) - The Canadian dollar strengthened against the U.S. dollar on Friday, modestly reversing a recent selloff, after encouraging news out of Europe lifted global economic sentiment.

The European Central Bank is considering setting yield band targets under a new bond-buying program to allow it to keep its strategy shielded and avoid speculators trying to cash in, central bank sources told Reuters on Friday. It’s a decision that will not be made before the ECB’s September 6 policy meeting, however, they said.

“That definitely helped risk appetite. You saw stocks rally on that and the Canadian dollar rallying a little bit on that as well,” said Benjamin Reitzes, senior economist and foreign exchange strategist BMO Capital Markets.

The Canadian dollar closed at C$0.9916 versus the U.S. dollar, or $1.0085, firmer than Thursday’s North American session close at C$0.9936, or $1.0064. The currency has come off three-and-a-half-month highs against the greenback reached this week, with currency strategists viewing the currency as oversold.

All eyes will be on U.S. Federal Reserve Chairman Ben Bernanke and other central bank leaders when they meet in Jackson Hole, Wyoming next week for an annual get-together that often hints at what monetary policy is to come.

In a letter obtained by Reuters on Friday, Bernanke told a congressional oversight panel the Fed has room to deliver additional monetary stimulus to boost the U.S. economy.

Also in focus will be Canadian GDP figures, which are expected to be soft, though Reitzes said the numbers will not be bad considering the state of the global economy.

“That being said, it’s nowhere near strong enough for the Bank of Canada to start raising rates,” he cautioned, noting that yields have been a meaningful driver of the currency in recent weeks.

“If Bernanke signals they’re going to ease further, it’s not as if the Bank of Canada can go on a hiking parade. There’s a limited amount that their policies can diverge,” said Reitzes, adding the limitations will cap strength in the Canadian dollar and limit upward pressure on yields.

Canadian bond prices slipped across the curve, with the two-year bond down 4 Canadian cents to yield 1.149 percent and the benchmark 10-year bond losing 1 Canadian cent to yield 1.825 percent.

Editing by James Dalgleish and Leslie Gevirtz

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