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Loonie slumps on taper concerns, China data

The Canadian dollar today fell to its weakest level against the dollar in a week, as a combination of strong US economic data and comments contained in the minutes from the last FOMC meeting raise fears that the Fed might be ready to taper its stimulus.

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By mid-afternoon in New York, USD/CAD had risen 0.69% to 1.0528, a one-week high. The Canadian dollar is often seen to move in tandem with risk appetite and has, as a consequence, shown to be vulnerable when expectations for Fed tapering draw in to shorter time-frames.

Yesterday’s minutes from the last FOMC meeting show Fed officials ready to taper in ‘coming months’ should the US economy stay in line with their forecasts for improvement. Today’s labour report showing a sizeable drop in jobless claims for last week plays into that scenario, which has pressured the Canadian dollar.

Appetite for ‘growth currencies’, such as the Loonie and the Australian dollar, has also been hit today by a report showing unexpectedly weak growth in Chinese manufacturing activity. The HSBC flash manufacturing PMI for November dropped to a level of 50.4 from October’s final reading of 50.9 . While far from disastrous (this is the second highest reading in the last seven months), it does suggest that the Chinese economy may be starting to slow down after a strong stretch over the last few months.

Canadian CPI and retail sales data are released tomorrow. The Bank of Canada has a target range for CPI of 1% to 3%, so tomorrow’s result could have a direct impact on monetary policy. Governor Stephen Poloz removed the so-called tightening bias from the rate announcement following the central bank’s last policy meeting. A poll of analysts conducted by Bloomberg points to a CPI rate of 0.8% for October and such a result would justify Mr Poloz’s position of adopting a less hawkish stance.

Mr Poloz spoke before Parliament in Ottawa yesterday and essentially said nothing had changed since the last policy meeting. ‘The bank judged on October 23 that the substantial monetary policy stimulus in place remained appropriate and decided to maintain the target for the overnight rate at 1%,’ he said. ‘Since then, while some new data points have been released, our outlook remains roughly the same.’

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