CANADA FX DEBT-C$ firms to three-month high as Fed stands pat

Wed Sep 18, 2013 4:40pm EDT
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* C$ at C$1.0222 vs US$ or 97.83 U.S. cents
    * Fed keeps bond buys at $85 billion a month
    * Canadian bond prices higher

    By Leah Schnurr
    TORONTO, Sept 18 (Reuters) - The Canadian dollar
strengthened to a three-month high against its U.S. counterpart
on Wednesday after the Federal Reserve surprised markets by
holding steady the pace of its economic stimulus program.
    The Fed maintained its $85 billion a month in bond
purchases, defying many investors' expectations that the central
bank would announce a small reduction of about $10 billion.
    After trading in a tight range for much of the day, the
Canadian dollar firmed to as high as C$1.0201 in the wake of the
Fed statement, the highest intra-session level since mid-June.
    The U.S. central bank expressed concerns that a recent sharp
rise in borrowing costs could weigh on the economy and cut its
economic growth projections for 2013 and 2014. 
    "It's come as a real shock they've left (policy) on hold,"
said Gareth Sylvester, director at Klarity FX. "That's certainly
going to help the risk-on sentiment in the marketplace."
    The Fed's bond purchases - known as quantitative easing -
have been a major driver of gains in equities and other
so-called risky assets this year. Wednesday's announcement
pushed the greenback broadly lower, with the dollar index 
down 1.3 percent. 
    The Canadian dollar ended the session at C$1.0222
to the U.S. dollar, or 97.83 U.S. cents, stronger than Tuesday's
session close of C$1.0295, or 97.13 U.S. cents. 
    Investors also took in comments from Canada's own central
bank head. Bank of Canada Governor Stephen Poloz struck an
upbeat note predicting the Canadian economy would start to pick
up and its potential for growth increase as the U.S. recovery
strengthens. Poloz spoke before the Fed's
    The Fed's decision to keep its stimulus unchanged could have
some impact on investors' perceptions of when the Bank of Canada
will resume raising rates, Sylvester said. The Bank of Canada
has held rates at 1 percent since September 2010.
    "Poloz has put an emphasis on the state of the U.S. recovery
in saying that Canada will benefit should growth increase in the
U.S.," he said. 
    "If we're now having a revision to the U.S. economic
outlook, that's going to have a mild negative bias onto the
Canadian economy as well, which is going to raise the question
are they in a position to raise rates just yet?"
    Prices for Canadian government bonds rose across the
maturity curve, with the two-year bond up 4 and a
half Canadian cents to yield 1.238 percent, and the benchmark
10-year bond rising 65 Canadian cents to yield 2.691