Loonie lower amid speculation on Fed stimulus tapering, positive Chinese data

TORONTO – The Canadian dollar was lower and the greenback strengthened Thursday morning after the U.S. Federal Reserve offered no clues as to when it might start to wind down a key bit of stimulus.

The commodity sensitive currency was down 0.24 of a cent to 97.11 cents US despite rising prices for oil and metals in the wake of a stronger than expected reading of the Chinese manufacturing sector.

The Fed also said at the end of its two-day meeting on interest rates Wednesday that economic growth increased at a modest rate since the last meeting, a slight downgrade from the moderate pace that was assessed at the last meeting in June.

There has been much speculation surrounding the Fed over the last two months, since chairman Ben Bernanke first mentioned that the central bank could start to taper its bond purchases later this year if economic conditions warrant. This key piece of economic stimulus is credited with keeping long term rates low and fuelling a strong rally on markets.

The Fed said Wednesday that it would carry on with its monthly $85 billion of bond purchases and that rates will remain unchanged near zero. Traders think it far more likely the Fed will move towards tapering the purchases at its next meeting in September.

“To us there was no shift in stance and as long as the economy unfolds according to the Fed’s forecasts, it is likely to begin tapering in September, completing by mid-2014, while interest rates are expected to remain on hold well into 2015,” said Scotia Capital chief currency strategist Camilla Sutton.

Commodity prices advanced in the wake of data showing that China’s official purchasing managers index hit 50.3 last month. That is up only slightly from June’s 50.1 reading but economists had expected a modest decline to below 50, the level which divides contraction and expansion.

The September crude contract on the New York Mercantile Exchange was up $1.91 to US$106.94 a barrel.

Copper added to Wednesday’s eight-cent rise, up six cents to US$3.18 a pound.

December bullion in New York was ahead $14.40 to US$1,327.40 an ounce.

Traders also turned their attention to the release of the U.S. non-farm payrolls report coming out Friday. Economists looked for the data to show that the economy created about 190,000 jobs during July.

Meanwhile, the European Central Bank left its benchmark interest rate unchanged at a record low of 0.5 per cent as the bank held off on further efforts to stimulate Europe’s lagging economy. The economy of the 17 European Union members that use the euro shrank 0.2 per cent in the first quarter, the sixth quarterly decline in a row.

Also, the Bank of England kept its monetary policy unchanged amid signs that the recovery in Europe’s third largest economy is gaining momentum. The bank confirmed it was leaving its main interest rate at 0.5 per cent and would not pump more money into the economy.