Canadian dollar sinks close to three-year low

The Loonie weakened against the US dollar today, despite an unexpected rise in Canadian factory sales.

With the Federal Reserve Open Committee (FOMC) commencing its latest two-day meeting to determine the short-term direction of monetary policy, forex traders are moderating their risk against the eventuality of a taper in stimulus.

Although the chances of such a decision are still viewed as being slimmer than a no change decision, the strength of recent economic data means nothing can be taken for granted.

A reduction in stimulus would hamper appetite for risk in the financial markets in general, and would likely be beneficial for the US dollar, while pressuring the Canadian dollar.

The benefit to the US dollar comes from the fact that stimulus measures are seen to debase a currency with time. If risk appetite drops, it would reduce demand for oil, Canada’s biggest export. As the US is Canada’s biggest trading partner, there is a risk that exports could additionally be hit if a taper causes US economic growth to slow.

By mid-afternoon in New York, USD/CAD had risen 0.16% to 1.0611, not far away from a three-and-a-half-year high. A level of 1.0684, reached on 4 December, is the highest rate attained by the currency pair since May 2010.

Canadian factory sales jumped in October to their highest level since May 2012, which could boost fourth-quarter GDP growth for Canada. Statistics Canada revealed a 1.0% increase in manufacturing sales for October, far above the 0.3% drop that had been forecast by a Reuters poll of economists.

The increase was driven by high food shipments, with food sales spiking 6.9% in October, a record gain. It is an interesting result, given the period in question covered the US government shutdown, and indicates Canadian manufacturers emerged unscathed from that testing stretch.

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