September 13, 2012 / 6:28 PM / in 5 years

C$ hits 13-month high after aggressive Fed move

TORONTO (Reuters) - The Canadian dollar strengthened to its highest level in more than a year against its U.S. counterpart on Thursday after the U.S. Federal Reserve announced an aggressive third round of stimulus measures to try to jumpstart the economy.

The currency rose as high as C$0.9665 versus the U.S. dollar, or $1.0347, its strongest level since August 4, 2011, when it hit C$0.9603, or $1.0413.

The rally came after the U.S. central bank said it will buy $40 billion of mortgage debt each month and continue to purchase assets until the outlook for jobs improves substantially. The announcement also sent equity markets higher.

“The Kool-Aid party is raging,” said Darcy Browne, managing director of Capital Markets Trading at CIBC.

“Trying to time the hangover is the hard part. But we got our answer as to whether or not the market had fully priced it in (the Fed’s move) or not, and clearly it hadn‘t.”

In a major shift in U.S. monetary policy, the Fed tied its unconventional bond buying directly to economic conditions as it tries to stimulate the U.S. labor market.

In addition, it said it would likely hold interest rates at current lows until at least mid-2015, a year later than its previous target.

“The Fed is making a clear commitment they’re going to continue to supply liquidity to the system until we see better numbers emerge in U.S. labor markets,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“It’s an indication of the very aggressive approach by the Fed. A little more aggressive than what was assumed.”

LEVELS “UNCOMFORTABLY STRONG”

The Canadian dollar finished at C$0.9683, or C$1.0327, up from Wednesday’s North American session close of C$0.9766, or $1.0240.

It has rallied about 2 percent in the last week on the back of a stronger Canadian labor environment, a hawkish Bank of Canada stance, and a bond buyback plan announced by the European Central Bank as well as the Fed move.

The currency has also outperformed most other major currencies this year, strengthening more than 5 percent against the greenback. Currency strategists have questioned the Canadian dollar’s lofty levels, however, given a recent run of disappointing domestic economic data.

“We are running it to levels that are uncomfortably strong,” said CIBC’s Browne. “Based on fundamentals, it doesn’t really belong at these levels.”

Analysts have pegged the next significant resistance level for Canada’s dollar at around C$0.94, last reached in July 2011.

“To say it can’t get there is foolish, but I think between here and there will be a very slow grind. Some of the barriers to the market -- the barriers we’ve noted -- have all been taken out now. There’s less targets to push it,” Browne said.

Canadian government bond prices rose across the curve, with the two-year bond up 4 Canadian cents to yield 1.168 percent. The benchmark 10-year bond rose 23 Canadian cents, yielding 1.878 percent.

Editing by Peter Galloway

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