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Canada dollar ends flat after Fed interest rate move

TORONTO: The Canadian dollar ended little changed on Tuesday, weathering the widely expected 25-basis-point increase from the US Federal Reserve with relatively little trouble.

The Canadian dollar closed at C$1.4690 (68.07 US cents) on Tuesday versus C$1.4691 (68.07 US cents) at the previous session's close.

The focus now turns to the Bank of Canada, which is almost universally expected to match the Fed's move by raising its benchmark bank rate to 5.50 percent at its 9:00 a.m. (1400 GMT) window for announcing policy changes on Wednesday.

"It's a given that 9 o'clock tomorrow morning you've got a quarter (of a percentage point)," said Steve Demers, director of foreign exchange with the National Bank of Canada in Montreal.

The Fed's move had little immediate impact on the currency, which strengthened to the C$1.4660 area before the Fed's announcement at 2:15 p.m. (1915 GMT), held generally steady afterward, then weakened as the session came to an end.

"In the very short term, it doesn't really have a major impact on the currency," Demers said.

Some currency market players had expected the Canadian unit to enjoy a "relief rally" after the news of the Fed's decision flashed across the news media, but it failed to materialise.

Other analysts said the relief rally will come after the Bank of Canada's intentions are known early on Wednesday.

"I think the relief rally will come tomorrow, after the Bank of Canada goes," Harvinder Kalirai, an economist with ideaglobal.com in New York, said on Tuesday.

The Canadian dollar was unsteady in early trading, with market players still somewhat apprehensive about the Fed's move, Kalirai said.

That early uncertain tone kept the currency from rallying significantly on news that Canada's trade surplus rose to a record high C$4.53 billion in January.

The unexpectedly high surplus, almost double December's C$2.74 billion surplus, beat the previous record monthly trade balance of C$4.47 billion, posted in May 1996.

Analysts, who underestimated the surge in exports, had expected the surplus to rise only marginally to C$2.93 billion in January. "I thought (the trade data) would have been a lot more helpful today, but I guess the Fed was in the back of everybody's mind," Kalirai said, adding that the trade data should provide "medium-term support" for the currency.

As the day progressed, the market moved beyond its worries about the Fed and gravitated towards the central scenario, which was a 25-basis-point move, Kalirai said.

Longer term, the outlook for the Canadian currency looks good, he added.

"I think the currency is going to improve over the next few weeks. I think the big hurdles that have been weighing on the Canadian dollar since early February are basically coming to an end," Kalirai said.

The combination of large bond maturities and coupon payments in March and the Japanese fiscal year end on March 31 had weighed on the currency, and as those factors pass the Canadian unit should appreciate, he said.

Activity in the currency was said by some sources to be moderate on Tuesday.

"I think most of the activity was from the corporate side. Whenever I talk to dealers in Canada, corporate desks, all they keep telling me is that there are (US) dollars to go," Kalirai said.

In cross-trading against major currencies, the Canadian dollar was at 72.59 yen and at C$1.4143 against the euro. The Canadian dollar was at A$1.1143 against the Australian dollar. -Reuters