Of the Group of Seven currencies, the Canadian dollar, along with related exchange traded fund, is the most sensitive to changes in Federal Reserve policy.
The CurrencyShares Canadian Dollar Trust (NYSEArca: FXC) dipped 0.3% Wednesday after the Fed $10 billion tapering announcement. FXC is down 6.2% year-to-date.
The Canadian dollar is currently trading around C$1.066 per U.S. dollar. [Canada Rate Policy Keeps Currency ETF Depressed]
The Canadian dollar, or loonie, and the U.S. 10-year Treasury yields are the most inversely correlated since August 2004, reports Joseph Ciolli for Bloomberg. Consequently, a rising U.S. yield due to Fed tightening could weaken the loonie further.
Rising yields in the U.S. make USD-denominated assets more attractive relative to Canadian assets, causing investors to dump the loonie in favor of the stronger U.S. dollar.
Meanwhile, the Bank of Canada has refrained from raising interest rates, with the BoC Governor Stephen Poloz maintaining that rates will remain unchanged for “quite some time.”
“We’re in the process of seeing a divergence in monetary policy,” Paresh Upadhyaya, the director of currency strategy at Pioneer Investment Management Inc., said in the article. “Canada can be expected to keep a very loose, accommodative monetary policy, in contrast to the Fed, which is set to start its tightening cycle.”