TORONTO (Reuters) - Canada’s currency closed stronger against the U.S. dollar on Wednesday after struggling for much of the session, helped by the greenback’s broadbased slide after an unprecedented press conference by the head of U.S. Federal Reserve.
The U.S. dollar fell against the euro and most other major currencies on Wednesday after the Fed said it will end its bond-buying program in June as planned and appeared in no rush to tighten monetary policy further.
Fed chairman Ben Bernanke said there was less momentum in the economy, but said the first quarter slowdown was “transitory.”
“If anything, the comments sounded slightly softer on the economy and there’s no reason to think the Fed’s moving anytime soon on interest rates,” said Shane Enright, executive director, foreign exchange sales at CIBC.
“The market positioning is certainly short-U.S. dollar, not only against Canada, but across all the currencies right now.”
After waffling weaker for much of the session, the Canadian dollar pared losses following the FOMC statement and finished the session at C$0.9504 the U.S. dollar, or $1.0522, stronger than Tuesday’s North American finish of C$0.9518.
The U.S. central bank is lagging other countries in tightening its monetary policy. The European Central Bank and China have both taken steps to cool their economies and the Bank of Canada is widely expected to resume raising interest rates as early as this summer.
Higher interest rates often support currencies because they tend to attract international capital flows.
But analysts said the Canadian dollar is still facing the headwind of uncertainty over the May 2 federal election, with support for the left-leaning New Democrats unexpectedly surging.
Analysts warned big gains for the party could trigger a knee-jerk drop in the currency and Canadian equity markets as investors fret about NDP plans to raise corporate taxes, spend more and redo energy policy.
“A little bit of political risk creeping into the currency ... it’s certainly caught a few people off guard in terms of a strong showing, and may have in fact been a bit of a surprise for some of the offshore investors,” said Enright.
“I certainly don’t want to suggest it’s causing a mass exodus of Canadian dollar positions, because I don’t think it is. But I think markets are perhaps, if anything, a little bit more wary.”
The prospect of an NDP-led minority government is a negative for the Canadian dollar given the view that the party is less business friendly and less focused on austerity, said Camilla Sutton, chief currency strategist at Scotia Capital.
“It’s not something that brings dollar/Canada to C$1.05, it’s something that weighs and has Canada underperform some of the crosses,” she said.
Canadian bond prices were sharply lower, mirroring losses in U.S. Treasuries that followed the Fed’s upward revision to its inflation forecasts.
“We’ve seen a bit of an unwind of the rally yesterday. Yields have bounced back in Canada and the U.S.,” said Kam Bath, fixed income strategist at RBC Capital Markets.
The two-year bond, was down 7.5 Canadian cents to yield 1.779 percent, while the 10-year bond lost 63 Canadian cents to yield 3.267 percent.
Canadian bonds mostly underperformed their U.S. peers, with the 10-year Canadian bond yield 8.4 basis points below its U.S. counterpart, compared with 12 basis points on Tuesday.
Canada’s sale of three-year government bonds on Wednesday met with solid demand.
“It was a decent auction, considering the situation -- coming half an hour before the FOMC,” said Bath.