CANADA FX DEBT-C$ hits 13-month high after aggressive Fed move

Thu Sep 13, 2012 5:11pm EDT
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* C$ hits C$0.9665 vs US$, or $1.0347
    * Highest level since Aug. 4, 2011
    * C$ finishes at C$0.9683, or C$1.0327
    * Fed launches aggressive monetary easing
    * Fed to hold interest rates until mid-2015
    * Bond prices rise across the curve

    By Solarina Ho
    TORONTO, Sept 13 (Reuters) - The Canadian dollar
strengthened to its highest level in more than a year against
its U.S. counterpart on Thursday after the U.S. Federal Reserve
announced an aggressive third round of stimulus measures to try
to jumpstart the economy.
    The currency rose as high as C$0.9665 versus the
U.S. dollar, or $1.0347, its strongest level since Aug. 4, 2011,
when it hit C$0.9603, or $1.0413.
    The rally came after the U.S. central bank said it will buy
$40 billion of mortgage debt each month and continue to purchase
assets until the outlook for jobs improves substantially. The
announcement also sent equity markets higher. 
    "The Kool-Aid party is raging," said Darcy Browne, managing
director of Capital Markets Trading at CIBC. 
    "Trying to time the hangover is the hard part. But we got
our answer as to whether or not the market had fully priced it
in (the Fed's move) or not, and clearly it hadn't."
    In a major shift in U.S. monetary policy, the Fed tied its
unconventional bond buying directly to economic conditions as it
tries to stimulate the U.S. labor market.
    In addition, it said it would likely hold interest rates at
current lows until at least mid-2015, a year later than its
previous target.
    "The Fed is making a clear commitment they're going to
continue to supply liquidity to the system until we see better
numbers emerge in U.S. labor markets," said Paul Ferley,
assistant chief economist at Royal Bank of Canada.
    "It's an indication of the very aggressive approach by the
Fed. A little more aggressive than what was assumed."

    The Canadian dollar finished at C$0.9683, or
C$1.0327, up from Wednesday's North American session close of
C$0.9766, or $1.0240.
    It has rallied about 2 percent in the last week on the back
of a stronger Canadian labor environment, a hawkish Bank of
Canada stance, and a bond buyback plan announced by the European
Central Bank as well as the Fed move.
    The currency has also outperformed most other major
currencies this year, strengthening more than 5 percent against
the greenback. Currency strategists have questioned the Canadian
dollar's lofty levels, however, given a recent run of
disappointing domestic economic data.
    "We are running it to levels that are uncomfortably strong,"
said CIBC's Browne. "Based on fundamentals, it doesn't really
belong at these levels."
    Analysts have pegged the next significant resistance level
for Canada's dollar at around C$0.94, last reached in July 2011.
    "To say it can't get there is foolish, but I think between
here and there will be a very slow grind. Some of the barriers
to the market -- the barriers we've noted -- have all been taken
out now. There's less targets to push it," Browne said.    
    Canadian government bond prices rose across the curve, with
the two-year bond up 4 Canadian cents to yield 1.168
percent. The benchmark 10-year bond rose 23 Canadian
cents, yielding 1.878 percent.