C$ firms after Fed comments, hits 7-month high

Wed Apr 25, 2012 4:37pm EDT
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* C$ ends at C$0.9835 to the US$, or $1.0168
    * Hits highest since Sept. 19 at C$0.9823
    * US$ slips after Bernanke, Fed statement
    * Bond prices mostly lower

    By Jon Cook	
    TORONTO, April 25 (Reuters) - Canada's dollar hit a
seven-month high against its U.S. counterpart o n W ednesday as
euro zone debt concerns eased and the U.S. Federal Reserve said
it would keep interest rates on hold until at least late 2014, a
week after the Bank of Canada signaled it may withdraw stimulus
    The Fed repeated its promise to leave interest rates on hold
near zero and described the U.S. economy as expanding
moderately. Chairman Ben Bernanke added that the central bank
"would not hesitate" to launch another round of bond purchases
to drive borrowing costs lower if it looked like the economy
needed it. 	
    The Fed decision contrasted sharply with last week's Bank of
Canada announcement that surprised the market with its hawkish
tone and its suggestion that it may need to start raising
interest rates. 	
    "Right now, Canada is looking like one of the rare countries
where there's possible hikes in place," said Sebastien Lavoie,
an economist at Laurentian Bank of Canada BLC Securities.
"Whereas in other countries, there will probably be no
modification at all in the stance of monetary policy."	
    Higher interest rates or expectations of higher rates tend
to help currencies strengthen by attracting international
capital flows. The Canadian dollar would likely strengthen
further against the greenback should Canada raise rates ahead of
the Fed.	
    The Canadian dollar finished at C$0.9835 against
the U.S. dollar, or $1.0168, up from Tuesday's close at C$0.9880
against the U.S. dollar, or $1.0121. It touched C$0.9823, its
highest against the greenback since Sept. 19.	
    Bank of Canada Governor Mark Carney was set to address the
Senate Standing Committee on Banking on Wednesday, a day after
he told the House of Commons finance committee that the central
bank might have to increase interest rates because of the
stronger performance of the economy and firmer underlying
    A recent Reuters survey of the country's primary dealers
showed the median forecast for the timing of the next rate
increase being pushed up to the first quarter of 2013. 	
    "The idea that Carney will not wait for Bernanke to
eventually withdraw some of the stimulus is certainly a positive
development for an appreciation of our currency," said Lavoie.	
    Andrew Kelvin, senior fixed-income strategist at TD
Securities, said the divergence in monetary policy positions
between the two central banks was "significant" and saw the
Canadian dollar eventually strengthening to C$0.950 against the
greenback, or $1.050, by end of 2013. 	
    The Canadian currency also benefited from a rally in equity
markets, which advanced after forecast-beating results from
Apple Inc, and an easing of conditions in Europe
reflected by weaker demand at a German auction of new 30-year
    Canadian government bond prices were mostly lower, mirroring
a drop in U.S. Treasuries, following the rally in equities and
the Fed announcement. 	
    A sale of Canadian three-year bonds drew strong
demand and the average yield rose to 1.598 percent, its highest
in nearly a year. 	
    "The higher yield just reflects the fact that the Bank of
Canada is coming back in play sometime in 2012," said Kelvin.
"We expect them to raise rates by September."	
    Canada's two-year bond edged down 3 Canadian
cents to yield 1.436 percent. The benchmark 10-year bond
 sank 32 Canadian cents to yield 2.110 percent.