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Canada dollar up on Fed move, corporate buying

TORONTO: The Canadian dollar ended substantially higher on Wednesday, after the Fed's decision to raise interest rates by 25 basis points reinforced earlier corporate buying interest in the currency.

The Canadian dollar closed at C$1.4398 (69.45 U.S. cents) on Wednesday after finishing at C$1.4468 (69.12 U.S. cents) in the previous session.

It slipped to the C$1.4541 area overnight as European players sold the currency, but rebounded in early North American trading and then began appreciating.

"Very strong corporate interest" to buy the Canadian dollar in both Canada and the U.S. was the primary force behind the currency's early resurgence, said Reid Farrill, executive director of foreign exchange with CIBC World Markets.

The currency was hovering around C$1.4424 just before the Fed's announcement, and then surged to the C$1.4380 area after the news broke.

"I think in terms of after the announcement, I think there's just a general feeling that the (Bank of Canada) will match. I think the uncertainty that the Fed will go 50 (basis points) is also out of the way," Farrill said.

The Bank of Canada is widely expected to match the Fed's move, possibly as early as its 9:00 a.m. (1400 GMT) window for announcing policy moves on Thursday.

The Canadian dollar could climb to its previous high for 2000 around the C$1.4310 level on Thursday, he said.

"Europe was a seller of Canada, and North America was a buyer of Canada," Farrill added.

The Fed emphasised the possibility of inflationary pressures in the U.S. economy in a statement after it increased the federal funds target rate and the discount rate by 25 basis points.

"The (federal open market committee) remains concerned that over time, increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth," it said.

"It looks like the blueprint is laid at least in the near term. We're going to be getting another rate increase in March," said Tom Benfer, director of foreign exchange with the Bank of Montreal in New York.

By declining to raise interest rates higher, the Fed will be able to keep market players guessing. "I think this way they keep the markets second guessing just a little bit by not knowing how much tightening in total we're going to be seeing," he said.

The robust performance of the Canadian stock helped inject some additional strength into the Canadian currency on Wednesday, Benfer said. "I think the Canadian stock market is probably propelling the Canadian dollar stronger," he said.

The TSE was up 234.24 points to 8,769.5 at the end of trading on Wednesday.

In cross-trading against major currencies, the Canadian dollar was at 75.10 yen and at C$1.4046 against he euro. The Canadian dollar was at A$1.0871 against the Australian dollar.-Reuters