Loonie claws back losses amid lower commodities, lower than expected U.S. growth

TORONTO – The Canadian dollar moved higher Wednesday following a string of losses that pushed the loonie down to its lowest levels since October, 2011.

The loonie advanced 0.26 of a cent to 95.42 cents US after going as low as 94.75 cents on Monday.

The U.S. dollar has made strong gains over the past week after Federal Reserve chairman Ben Bernanke indicated the central bank could move to taper its bond buying program. The US$85 billion of bond purchases have kept long-term rates low and encouraged lending.

Bernanke made it clear that such a move depends on the strength of the U.S. economy. The greenback had accelerated Tuesday in the wake of solid reports on manufacturing, housing and consumer sentiment.

U.S. bond yields have also spiked over the past week on speculation the Fed could move to ease up on its bond purchases later this year and wind up the program by the middle of 2014.

On Wednesday, the benchmark U.S. 10-year Treasury yielded 2.54 per cent, up from 2.25 per cent before Bernanke’s remarks last Wednesday and about 1.7 per cent at the beginning of May.

The commodity-sensitive Canadian dollar rose amid sliding prices for oil and metals.

The August crude contract on the New York Mercantile Exchange drifted 23 cents lower to US$95.09 a barrel.

July copper declined two cents to US$3.05 a pound and August bullion on the Nymex fell $35.80 to US$1,239.30 an ounce after earlier falling to a three year low of US$1,223.20. Gold prices have deteriorated steadily this year as the precious metal loses its appeal as a hedge against inflation and deteriorating currencies.

The pace of its decline has picked up over the last week since Bernanke signalled the Fed could be ready to slow down its bond purchases, known as quantitative easing.

Meanwhile, traders also took in data showing that first quarter U.S. economic growth came in much lower than first thought. Gross domestic product grew at an annualized rate of only 1.8 per cent, down sharply from the previous reading of 2.4 per cent.

The steep revision was mostly because consumers spent less, suggesting higher taxes are having a deeper impact on economic growth.

“The weaker start to the year may have some people downgrading the chances of an early tapering by the Fed, particularly if consumer spending in Q2 looks softer as a result,” said CIBC World Markets economist Andrew Grantham.

“However, with the first quarter now well in the rear-view mirror, next week’s data from the (manufacturing sector) and non-farm payrolls report may still be more important in determining when and by how much the Fed tapers QE.”