C$ weaker as Fed uncertainty plagues investors

TORONTO: The Canadian dollar weakened against the greenback on Thursday after strong retail sales and a recent budget deal south of the border prompted some speculation the Federal Reserve could start unwinding its economic stimulus sooner rather than later.

At home, the loonie saw little reaction to comments from Bank of Canada Governor Stephen Poloz, who said the central bank is likely to keep interest rates on hold "for quite some time", dampening talk that it was edging closer to cutting rates in order to combat low inflation.

"The Bank may not be as dovish as people thought they were," said Benjamin Reitzes, senior economist at BMO Capital Markets in Toronto.

"There was an increasing market lean toward the Bank being consistently more dovish. It certainly looked that way in their statements, so I wouldn't totally discount that, but maybe he is just trying to take the edge off a little bit at this point."

The loonie has lost more than 3 percent since late October when the central bank dropped its long-held rate hike bias.

Along with expectations that rates will stay low for longer, the loonie has also been hit by uncertainty about the path of US monetary policy and the currency touched a 3-1/2-year low last week.

The Canadian dollar ended the North American session at C$1.0640 to the greenback, or 93.98 US cents, weaker than Wednesday's close of C$1.0593, or 94.40 US cents.

Data showed Americans bought more automobiles and other goods in November, adding to signs of a strengthening economy that could draw the Fed closer to reducing the pace of monetary stimulus, though the outlook was clouded somewhat by a big jump in first-time applications for unemployment benefits last week.

The reports come on the heels of last week's better-than-expected employment report and a provisional budget deal in Washington.

Investors are focused on trying to gauge when the Fed will trim its bond-buying program, which has been a major driver in markets this year and currently stands at $85 billion a month. Fed policymakers will meet next week.

A faster timetable for the Fed is seen as a negative for the Canadian dollar as the move is expected to reduce risk appetite and benefit the US currency.

Canadian government bond prices were mixed across the maturity curve, with the two-year unchanged to yield 1.100 percent and the benchmark 10-year down 15 Canadian cents to yield 2.667 percent.