Loonie falls ahead of BOC Governor’s speech

The Canadian dollar has weakened against its US counterpart for the first time this week, a day before Bank of Canada Governor Stephen Poloz is due to speak on Monetary policy, and as upbeat US economic data raises the prospect of an early Fed taper.

The Canadian dollar has been faring well of late against the US dollar, gaining in each of the last six trading days, and it even hit a two-week high earlier in today’s session, but like most currencies it has lost ground against the dollar as the day has progressed.

The minutes of the last Fed meeting conveyed quite clearly that members of the FOMC would be looking to reduce the size of the Fed’s monthly bond purchases if incoming data continues to show improvement in the US economy. Overall the data has pointed to a strong November, with buoyant retail sales and payrolls reported in the last seven days. That has led to many rethinking the notion that March is the most likely meeting for an introduction of a taper.

The December meeting doesn’t look quite so unlikely now, although given the shakiness of October there is a big question over whether the Fed will wait to see if December continues on the same upward curve as November. If December does prove too soon (the meeting begins on Tuesday 17 December), January could be a likely candidate. Because quantitative easing acts to debase a currency, expectations that the Fed will taper sooner than March are bolstering the US dollar.

Stephen Poloz, the Governor of the Bank of Canada, speaks in Montreal tomorrow on ‘Monetary Policy in Risk Management’ with a press conference slated to follow his address.

The Bank of Canada kept its key interest rates unchanged last week. While this was widely expected, the statement issued by the central bank recognised that growth in exports and business investment remains disappointing, areas that the BOC had anticipated taking up the slack in the economy.

This, along with the revelation the central bank sees downside risks to inflation that outweigh the household imbalances that so concerned previous Governor Mark Carney, seemed to erase any chance of Canadian rates being raised in the near future, which pressured the Canadian dollar to a three-year low against USD in the wake of the announcement.

If Mr Poloz goes over these concerns in his speech tomorrow it may be enough to cause a reaction in the Canadian dollar. By mid-afternoon in New York USD/CAD was up 0.47% at 1.0640.

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