November 2, 2010 / 9:00 PM / 7 years ago

CANADA FX DEBT-C$ nears parity as Fed stimulus decision looms

   * C$ rises to 99.06 U.S cents
 * Investors eye central banks, U.S. elections, data  (Updates to close)
 Claire Sibonney
 TORONTO, Nov 2 (Reuters) - Canada’s currency climbed to within a cent of parity with the U.S. dollar on Tuesday, as markets bet the U.S. Federal Reserve will soon deliver a hefty dose of monetary easing, which could further weaken the greenback.
 Markets are generally priced for the U.S. central bank on Wednesday to commit to buying between $80 billion and $100 billion worth of assets per month under a new program to bolster the struggling economy. [ID:nNLLRLE6LL] [ID:nN02172993]
 “If it’s significantly more aggressive than that, we could see another round of U.S. dollar selling, and that could very easily push dollar/CAD back to parity or even beyond,” said Matthew Strauss, senior currency strategist at RBC Capital Markets.
 The Canadian dollar CAD=D4 rose as high as C$1.0081 to the U.S. dollar, or 99.20 U.S. cents, its strongest level in more than two weeks. It eased slightly to finish at C$1.0095 to the U.S. dollar, or 99.06 U.S. cents, up from C$1.0161 to the U.S. dollar, or 98.42 U.S cents, at Monday’s close.
 Earlier, the Canadian dollar got an extra lift from Australia’s surprising interest rate hike and some positive economic news in the euro zone, as well as media speculation regarding BHP Billiton’s (BHP.AX) hostile $39 billion bid for Potash Corp (POT.TO). [ID:nN02206060]
 The currency pushed above parity with the U.S. dollar last month but had no staying power, partly because the Bank of Canada’s last policy statement was more dovish than some had expected.
 “We’re just a penny shy of parity once again. What’s going to push us over? There’s no shortage of event risks and developments over the next few days that could,” said Eric Lascelles, chief Canada macro strategist, at TD Securities.
 Fears over a further U.S. dollar selloff were also accentuated by Bill Gross, the manager of Pimco, the world’s largest bond fund, who told Reuters the U.S. currency is in danger of losing 20 percent of its value over the next few years if the Fed creates huge amounts of new money in a bid to revive the economy.  [ID:nN01175131]
 Investors also awaited the results of U.S. midterm elections on Tuesday and some analysts said a Republican win could be positive for the U.S. currency on hopes for more fiscal austerity and reduced government regulation.
 “The market has already largely priced in a House that will be in Republican control, maybe even a Senate in Republican control, so I think the impact from the elections on the markets will be very limited,” Strauss noted.
 “Going forward ... it will have implications for 2011 regarding fiscal policy and the likelihood of another stimulus package,” he said.
 This week’s events pose strong potential for market swings as investors will also absorb policy decisions from other central banks and U.S. and Canadian monthly jobs data, due on Friday.
 Strauss said, near term, a key support level for the U.S. dollar versus Canada was C$0.9981, and resistance is seen at C$1.0157.
 BONDS DIP
 Canadian government bond prices were mostly lower, taking a wait-and-see approach ahead of Wednesday’s Fed’s decision. U.S. Treasury prices rose in light volume as investors took advantage of a recent rise in yields and covered short positions. [US/]
 Fixed income strategists have said that while the prospect of quantitative easing has recently pushed yields lower, that has largely already been priced in. Although a more aggressive move than anticipated should be met with another rally in bonds.
 The two-year bond CA2YT=RR  fell 5 Canadian cents to yield 1.436 percent, while the 10-year bond CA0YT=RR shed 38 Canadian cents to yield 2.883 percent.  (Additional reporting by Ka Yan Ng; editing by Rob Wilson)                                                      

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