CANADA FX DEBT-Loonie weakens after Fed reduces bond buys

Wed Dec 18, 2013 2:48pm EST
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* Canadian dollar at C$1.0620 or 94.16 U.S. cents
    * Fed announces taper of quantitative easing program
    * Bond prices mixed across the maturity curve

    By Leah Schnurr
    TORONTO, Dec 18 (Reuters) - The Canadian dollar weakened
against the greenback on Wednesday after the Federal Reserve
announced plans to trim its economic stimulus program that has
been a major driver of global markets this year.
    The central bank said it would reduce its monthly asset
purchases by $10 billion to total $75 billion and trimmed
equally from mortgage and Treasury bonds. At the same time, the
Fed tried to temper what could be a surprise for some investors
by suggesting its key interest rate would stay low for even
longer than previously promised. 
    The Canadian dollar hit a session low following the
announcement before paring declines. The withdrawal of stimulus
is seen as bearish for the Canadian dollar because it is
expected to reduce appetite for risk and benefit the U.S.
    "A little bit of a shock to the markets," said Scott Smith,
senior market analyst at Cambridge Mercantile Group in Calgary.
    "A reduction in stimulus on a global perspective from a
liquidity standpoint is going to be a negative for high-beta
currencies, like the loonie."
    The Canadian dollar was at C$1.0620 to the
greenback, or 94.16 U.S. cents, weaker than Tuesday's close of
C$1.0610, or 94.25 U.S. cents. The loonie hit a session low of
    Markets have been focused on December's Fed meeting for
weeks and expectations were divided heading into the statement
over whether the Fed would taper or not.
    "The market now has a bit of relief in regards to that we've
finally seen a taper. But that being said, as that stimulus is
eventually unwound, it's going to continue to put further
pressure on the loonie as we go," said Smith.
    Canadian government bond prices were mixed across the
maturity curve, with the two-year up 1-1/2 Canadian
cents to yield 1.101 percent and the benchmark 10-year
 down 22 cents Canadian cents to yield 2.669 percent.