The loonie, as the Canadian dollar is known, snapped three weeks of declines against its US counterpart, as investors weighed BoC’s decision to maintain interest rates for “quite some time”, in contrast with the Fed’s decision to let borrowing costs rise by cutting its bond-purchasing program “in the coming months”.
USD/CAD reached a daily high at 1.0670 at 10:00 GMT, after which the pair closed at 1.0583 on Friday, declining 0.53% for the day. Support was likely to be received at December 12th low, 1.0561, while resistance was to be encountered at December 6th high, 1.0707. On December 4th USD/CAD touched 1.0708, the highest level since May 26th 2010.
The loonie fluctuated against the greenback as the relative interest rate advantage of Canadas two-year bonds compared with US counterparts declined to 77 basis points, the narrowest spread since September 4th. This diminished the relative appeal of the Canadian dollar-denominated debt.
“We’ve seen some gradual erosion in short-term yields, between Canada and the U.S. which may add some more short-term pressure on the Canadian dollar. From a broader point of view it’s probably about the FOMC and the tapering bet that’s supporting the dollar.” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, cited by Bloomberg.
Meanwhile, a recent series of upbeat economic data from the US reinforced speculations the Federal Reserve might begin scaling back its monthly bond purchases at FOMC’s meeting next week.
Speculations for an earlier-than-expected tapering were reinforced on Thursday after the Commerce Department reported that retail sales rose solidly in November as Americans purchased automobiles and a range of other goods. Retail sales rose by 0.7% last month, beating analysts’ projections for a 0.6% gain, while October’s reading received an upward revision to 0.6% from initially estimated at 0.4%. The upbeat general indicator was lifted by a 1.8% jump in sales at auto and parts dealers, which offset a 1.1% decline in fuel prices.
Retail sales less autos, which exclude the volatile automobile sales, rose by 0.4% from an upward revised 0.5% a month earlier, exceeding expectations for a 0.2% advance.
Core retail sales, which exclude automobiles, food services, gasoline and building materials and correspond more closely to the consumer spending component of GDP jumped by 0.5% after advancing 0.7% in October.
The upbeat sales added to the steadily building-up positive sentiment for the US economic recovery, buoyed by a larger-than-expected third quarter growth and unemployment hitting the lowest level in 5 years. The numbers, coupled with a possible two-year budget accord that would lift the fiscal uncertainty, led more analysts to believe the Federal Reserve might actually trim its $85 million monthly bond purchases at FOMC’s meeting next week.
On Wednesday, US policymakers unveiled an agreement to ease automatic spending cuts by about 60 billion USD over two years and cut the nation’s deficit by $23 billion. US Senator Patty Murray, a Democrat, and Republican Representative Paul Ryan said that the budget proposal could prevent a government shutdown when funding authority expires January 15th and could favor the economy. The agreement sets a budget ceiling for the fiscal 2014 at $1.012 trillion and $1.014 trillion for the fiscal 2015.
The FOMC’s October meeting minutes pointed that Federal Reserve officials may reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves. Central bankers are set to reconvene on December 17-18th.
The Federal Reserve may begin to scale back its $85 billion in monthly asset purchases at the committee’s policy meeting on December 17th-18th rather than wait until January or March, according to 34% of economists who participated in a Bloomberg survey on December 6th. In November’s survey, 17% of respondents projected a tapering in December.