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Loonie drops sharply on tapering expectations

The Canadian dollar dropped against most major currencies today, as conjecture grows that the Fed will act to lower the pace of its monthly purchases next month.


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USD/CAD rose 0.45% to 1.0390 by mid-afternoon in New York, while CAD/CHF slid more than 1%. Demand for growth currencies is being constrained by speculation that the Fed will begin tapering its monetary stimulus as early as next month, ahead of tomorrow’s minutes from the last FOMC meeting.

The minutes should contain more information over how the discussion went last month over whether to taper or not. Members of the Fed will meet for an annual get-together in Jackson Hole, Wyoming, on 22 August in order to consider monetary policy. Chairman of the Federal Reserve Ben Bernanke, whose tenure comes to an end next January, will not be in attendance.

The uncertainty over the Fed’s actions is reducing risk appetite, which has affected commodity prices. Crude oil, Canada’s most important export, had a strong, geo-political-driven run last week, but its progress has been checked this week as risk appetite has dried up.

Statistics Canada will reveal retail sales data later this week for June. A Bloomberg survey of analysts forecasts a 0.9% drop. Canadian retail sales saw an unexpectedly large jump in May, rising 1.9%.

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