June 20, 2012 / 5:39 PM / 5 years ago

CANADA FX-C$ recovers amid Fed afterthought

* Canada dollar at C$1.0176 vs US$, or 98.27 U.S. cents

* Bond prices extend losses across curve

* Fed extends Operation Twist bond-buying program

By Claire Sibonney

TORONTO, June 20 (Reuters) - The Canadian dollar recovered from a session low against its U.S. counterpart on Wednesday after a volatile reaction to the U.S. Federal Reserve’s decision to extend its monetary stimulus to a U.S. economic recovery that looks at risk of stalling.

Following the announcement, the currency weakened as far as C$1.0232 versus the greenback, or 97.72 U.S. cents, from around C$1.0203, or 98.01 U.S. cents heading into the Fed’s release.

The Fed, as expected, said it was extending Operation Twist, an effort to depress borrowing costs by selling short-term bonds to buy longer-dated ones. The U.S. central bank will buy $267 billion in longer-dated securities through the end of 2012. The Fed’s “Twist” program was set to end this month.

The Canadian dollar’s initial knee-jerk negative reaction mimicked a fall in equity markets and a rally in the U.S. dollar.

“There’s volatility around any Fed decision and today’s is no different ... equity markets were clearly too bullish and expectations had been raised too much and now we’re seeing negativity but it could be short-lived,” said Jack Spitz, managing director of foreign exchange at National Bank Financial.

“(The Canadian dollar) is following what it normally follows, which is the tenor of risk and the move lower in equities has created a better bid for the (U.S.) dollar and by extension a better bid for dollar/Canada as well.”

Earlier in the session, the currency hit a four-week high against the greenback in anticipation of such a move by the Fed, but unwound those gains heading into the announcement as investors fears markets had gotten ahead of themselves.

By 1:15 p.m. EDT (1715 GMT), the Canadian dollar stood at C$1.0176 versus the U.S. dollar, or 98.27 U.S. cents, still slightly stronger than Tuesday’s North American close at C$1.0182 against the U.S. dollar, or 98.21 U.S. cents.

Matt Perrier, director of foreign exchange sales at BMO Capital Markets, put U.S. dollar support around C$1.0125, near the 50 percent retracement level from its April low against the Canadian dollar around C$0.98 to a high of C$1.0446 reached a couple weeks ago.

Canadian bond prices extended losses after the Fed decision. Canada’s two-year bond fell 15 Canadian cents to yield 1.111 percent, while the benchmark 10-year bond dropped 33 Canadian cents to yield 1.794 percent.

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