Loonie strengthens despite dovish Bank of Canada

Wed Oct 26, 2011 4:37pm EDT
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By Andrea Hopkins

TORONTO (Reuters) - The Canadian dollar ended stronger against its U.S. counterpart on Wednesday, in defiance of a gloomy outlook from the Bank of Canada, as investor optimism about a European debt summit buoyed risk sentiment.

Pointing at deep global risks, the Bank of Canada painted a darker picture of the domestic economy as it looked to the likelihood of a recession in Europe and continuing weakness in the United States.

In its quarterly Monetary Policy Report, the central bank slashed its fourth-quarter growth forecast to an annualized 0.8 percent from 2.9 percent, down from a likely 2 percent in the third quarter.

While the dovish message - meaning official interest rates will likely stay low for longer - would typically weaken the Canadian dollar, traders said a partial recovery by the euro and global stock markets was helping offset the gloom.

"A lot of the reason why dollar-Canada has come back below C$1.01 is that equities have begun to reverse and the euro has picked up a bit ... (but) I'm a little bit surprised that we've come back to where we are," said David Bradley, director of foreign exchange at Scotia Capital.

The Canadian dollar ended the North American session at C$1.0048 to the U.S. dollar, or 99.52 U.S. cents, more than a cent above Tuesday's session close at C$1.0163 to the U.S. dollar, or 98.40 U.S. cents, and well above lows plumbed early in the day.

Bradley said the strength was likely due to investor optimism and market positioning as European Union officials made progress in debt talks.

But he and other currency strategists doubted the Canadian dollar strength could last, given the risks enumerated by the central bank.   Continued...