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Canadian Dollar gains for fifth straight day

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar strengthened to a three-year high against its U.S. counterpart on Thursday as oil prices climbed and investors adjusted to more hawkish messaging from the Bank of Canada compared to the Federal Reserve.

The loonie was trading 0.3% higher at 1.2280 to the greenback, or 81.43 U.S. cents, extending a string of gains since last Friday and the biggest gain among G10 currencies.

It touched its strongest level since February 2018 at 1.2278.

Reaction to central bank guidance and higher oil prices are “two forces really working in favor of the Canadian dollar for now,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets.

Rai expects the currency to strengthen further to the 1.2050 area in the near term but was less bullish on its longer term outlook.

The Bank of Canada last week signaled it could start hiking rates from record lows in late 2022 and cut the pace of its bond purchases.

Canada‘s GDP report for February is due on Tuesday which could offer further clues on the central bank’s policy outlook.

In contrast, the Federal Reserve on Wednesday said it was too early to consider rolling back emergency support for the economy, pressuring the U.S. dollar.

The price of oil, one of Canada‘s major exports, settled 1.8% higher at $65.01 a barrel as strong U.S. economic data offset concerns about the impact of higher COVID-19 cases in Brazil and India.

Canadian government bond yields were higher across a steeper curve. The 10-year touched its highest since March 30 at 1.611% before dipping to 1.572%, up 3.9 basis points on the day.

 

(Reporting by Fergal Smith, Editing by Nick Zieminski and Chizu Nomiyama)

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Economy

Canadian dollar seen consolidating gains as drumbeat builds for Fed taper

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar is expected to give back some of its recent gains over the coming year as the Bank of Canada‘s more hawkish stance is offset by potential dialing back of the U.S. Federal Reserve’s asset purchase program, a Reuters poll showed.

The median forecast of nearly 40 strategists in the May 3-5 poll was for the Canadian dollar to weaken 1% over the next three months to 1.24 per U.S. dollar, or 80.65 U.S. cents. It is then expected to trade at that same level in one year, compared to 1.23 seen in April’s poll.

“We think a lot of good news is in the price of the CAD, so we look for a little bit of tactical softening,” said Mazen Issa, senior FX strategist at TD Securities in New York.

The loonie has climbed 3.7% since the start of the year, the biggest gain among G10 currencies. On Wednesday, it touched its strongest intraday level since February 2018 at 1.2252.

The currency has been bolstered by higher prices for commodities such as oil, one of Canada‘s major exports, and an improved outlook for the domestic economy as the rollout of the COVID-19 vaccine gathers pace.

In addition, the Bank of Canada last month changed its guidance to show it could start raising its benchmark interest rate from a record low of 0.25% in late 2022. It also tapered its bond purchases, becoming the first major central bank to cut back on pandemic-era money-printing stimulus programs.

Analysts say the Federal Reserve could follow the BoC’s lead.

“We think that the odds are increasing that the Fed will have to acknowledge the strength in the U.S. economy and hint at a taper in late summer/early fall,” said George Davis, chief technical strategist at RBC Capital Markets.

“This would lead to a re-pricing in U.S. interest rate expectations that would be expected to boost the USD as the timing for U.S. rate hikes is brought forward.”

The U.S. central bank’s current guidance is to leave interest rates on hold until at least 2024.

Money markets expect two Bank of Canada rate hikes in 2022, as opposed to one from the Fed, reflecting the Canadian central bank’s more hawkish guidance, but past tightening cycles show that faster liftoff for the BoC may not be sustained.

“Things are not moving in isolation,” Issa said. “At the end of the day, FX is a relative game.”

(For other stories from the May Reuters foreign exchange poll:)

 

(Reporting by Fergal Smith; Polling by Sujith Pai and Nagamani L; Editing by Toby Chopra)

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Economy

Bank of England line up to taper emergency stimulus

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The Bank of England’s decision on Thursday to slow the pace of its bond-buying makes it the second central bank from a G7 economy to begin the slow exit from pandemic-era money-printing stimulus schemes.

The big three of central banking – the U.S. Federal Reserve, European Central Bank and the Bank of Japan – won’t officially pare stimulus for a while.

Yet there are growing signs that policymakers have their eyes on the exit as vaccine rollouts pick up and growth bounces back. The Bank of Canada‘s C$1 billion ($806 million) cut to its weekly bond-buying programme last month highlights the next phase is about slowing hefty asset purchases.

Bank of America estimates central bank asset purchases in the United States, Japan, the euro zone and Britain will slide to about $3.4 trillion this year from almost $9 trillion in 2020. For 2022, it predicts purchases of just $400 billion.

Here’s a look at who is tapering, who may raise interest rates and who might be the last to call time on pandemic-era monetary stimulus.

1/ NORWAY

Norges Bank is at the vanguard in terms of signalling a retreat, and said on Thursday it is on track to hike interest rates in the second half of 2021.

That has made the crown this year’s best performing G10 currency. The central bank doesn’t intervene in bond markets, so the taper debate is not applicable.

2/ CANADA

Having announced tapering, Canada has signalled that its key interest rate could rise from 0.25% late in 2022.

3/ BRITAIN

Flagging a stronger economic rebound, the BoE will slow bond-buying to 3.4 billion pounds ($4.7 billion) a week, from the 4.4 billion-pound current weekly pace.

However, it kept the total size of the bond-buying programme unchanged at 895 billion pounds and Governor Andrew Bailey said the move did not amount to tapering.

“Since the Bank has already purchased 70 billion pounds out of the 150 billion pounds in gilts to be purchased by the end of 2021, purchases were already set to naturally slow,” Ambrose Crofton, global market strategist at JPMorgan Asset Management, said.

 

For a graphic on British bond markets stable as BoE slows weekly bond buys:

https://fingfx.thomsonreuters.com/gfx/mkt/jbyvryljzpe/GB0605.png

 

4/ UNITED STATES

The Fed plans to keep borrowing costs near 0% and maintain monthly asset purchases worth $120 billion until it sees “substantial further progress” towards full employment and its 2% flexible inflation target.

But with the economy expected to grow by more than 6% this year and inflation to be a “little higher” – according to Fed boss Jerome Powell – markets are pricing in a rate rise in 2023. Many analysts expect tapering to start this year.

The Fed faces a delicate balancing act, ensuring that tapering at a time of massive U.S. government borrowing does not boost Treasury yields too much.

Pictet Wealth senior economist Thomas Costerg expects tapering to start by early 2022 and proceed at a monthly pace of $10 billion. That process would last about a year – “enough to keep expectations for the first rate hike well in the distance”, he added.

 

For a graphic on Central bank holdings of government bonds:

https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjdwyevr/CBANKS2704.PNG

 

5/ SWEDEN

Swedish inflation is approaching the Riksbank’s 2% target but it has said interest rates would stay at 0% for years. However, its 700 billion crowns ($84 billion) asset purchase programme will wind down this year as planned.

6/ EURO ZONE

Anaemic long-term inflationary pressures mean euro area rates are unlikely to rise for years. But tapering may come sooner, especially within the European Central Bank‘s 1.85 trillion euro ($2.2 trillion) pandemic emergency purchase programme (PEPP).

Technically, this runs until March 2022 but some officials are already advocating reducing bond purchases as growth rebounds.

Danske Bank analysts reckon the ECB will end up using only 1.65 trillion euros of the total PEPP stimulus package.

 

For a graphic on ECB weekly PEPP purchases:

https://fingfx.thomsonreuters.com/gfx/mkt/jznpnrbeopl/ECB0605.PNG

 

7/ AUSTRALIA

Australia’s economic rebound has surpassed expectations but the Reserve Bank of Australia, which has underscored its dovish credentials by adopting yield curve control, could be among the last to tighten policy.

It wants unemployment slashed and inflation within its 2% to 3% target before shifting tack, and doesn’t see either happening until 2024. Economists expect rates to stay on hold until then.

The RBA’s A$100 billion ($77.45 billion) QE programme ends in September and it will consider in July whether to extend it.

8/ NEW ZEALAND

New Zealand’s strong recovery and red-hot property markets have raised speculation a rate rise may come sooner than expected.

While its key interest rate is expected to stay at 0.25% this year, some analysts predict a rise in the second half of 2022. The central bank meanwhile appears to be in no hurry to taper its NZ$100 billion ($72 billion) QE programme.

9/ JAPAN

The BOJ pledged last week to maintain stimulus using yield target control and via bonds and equity purchases.

It has been accused of “stealth tapering” because its bond-buying has slowed since yield curve control (YCC) was adopted in 2016, though purchases have picked up slightly in the past year.

In March, they were about 22.2 trillion yen ($204 billion)above levels a year ago. But that’s still a quarter of the 81.96 trillion yen year-on-year increase in August 2016, just before YCC came in.

 

For a graphic on BOJ steadily ‘stealth’ tapering its JGB buying:

https://graphics.reuters.com/GLOBAL-CENTRALBANKS/TAPER/bdwpkbmllvm/chart.png

 

10/ SWITZERLAND

The Swiss National Bank does not intervene in domestic bond markets, instead capping the Swiss franc through interventions which came to nearly 110 billion francs ($120 billion) in 2020. The proceeds are used to purchase foreign bonds and equities.

The SNB shows no signs of departing from its interventionist policy; its chairman Thomas Jordan said last week that negative rates and a readiness to intervene in currency markets remain “essential”.

 

(Reporting by Sujata Rao, Tommy Wilkes, Saikat Chatterjee and Dhara Ranasinghe in London and Leika Kihara and Daniel Leussink in Tokyo; Editing by Toby Chopra)

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Economy

Toronto Stock Exchange falls 0.1% to 19,290.98

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tsx

* The Toronto Stock Exchange’s TSX falls 0.10 percent to 19,290.98

* Leading the index were Endeavour Silver Corp <EDR.TO​>, up 10.0%, ARC Resources Ltd​, up 8.5%, and SSR Mining Inc​, higher by 8.1%.

* Lagging shares were Lithium Americas Corp​​, down 9.0%, Trillium Therapeutics Inc​, down 7.8%, and AcuityAds Holdings Inc​, lower by 7.6%.

* On the TSX 125 issues rose and 102 fell as a 1.2-to-1 ratio favored advancers. There were 25 new highs and 1 new low, with total volume of 244.4 million shares.

* The most heavily traded shares by volume were Enbridge Inc, Manulife Financial Corp and Arc Resources Ltd.

* The TSX’s energy group rose 1.19 points, or 1.0%, while the financials sector climbed 0.56 points, or 0.2%.

* West Texas Intermediate crude futures fell 1.17%, or $0.77, to $64.86 a barrel. Brent crude  fell 1.02%, or $0.7, to $68.26.

* The TSX is up 10.7% for the year.

This summary was machine generated May 6 at 21:24 GMT.

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