BUSINESS

Loonie up following sharp losses: traders look to Fed rate hint, U.K. vote

09/15/2014 08:47 EDT | Updated 11/15/2014 05:59 EST
TORONTO - The Canadian dollar closed higher Monday after taking a beating on currency markets last week amid caution on markets ahead of two major events.

"This week holds major event risk and accordingly will have markets trading somewhat nervously," said Camilla Sutton, chief FX strategist, managing director, Scotiabank Global Banking and Markets.

The loonie was up 0.36 of a cent to 90.5 cents US. The currency had plunged about 1.75 cents US last week as the U.S. dollar appreciated and oil prices sunk to two-year lows amid lower demand and higher production.

The greenback had strengthened ahead of Wednesday's interest rate announcement by the Federal Reserve. Traders will be curious to see if the U.S. central bank drops a hint that it could raise interest rates sooner than mid-2015 when it is generally expected that short-term rates will start to head up from near zero, where they have been since the financial crisis.

Specifically, they will be looking at the Fed's statement Wednesday to see if there will be a change in key language. For some time, the Fed has reassured markets that "it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends."

Markets will look at the document to see if the Fed drops the words "considerable time."

The asset purchase program involving the buying of hundreds of billions of dollars of bonds is widely expected to end at the end of October.

There also has been great uncertainty on markets about the referendum Thursday on Scottish independence. The result is generally believed to be too close to call.

A Yes vote would result in huge complications from currency to membership in the European Union and NATO.

Oil and metal prices were depressed amid weak data showing that Chinese industrial production decelerated markedly in August, rising just 6.9 per cent from a year earlier. It is the slowest growth since the 2008-09 global financial crisis and left markets wondering if the economy can reach the 7.5 per cent growth level targeted by the Chinese government.

The October crude contract in New York gained 65 cents to US$92.92 a barrel.

The weak Chinese data pushed December copper down two cents to US$3.09 a pound. December gold bullion gained $3.60 to US$1,235.10 an ounce.

The lacklustre Chinese data was released as a major international organization cut its growth forecast for the countries that use the euro and says the troubled currency union needs even more stimulus from the central bank and governments.

The Organization for Economic Co-operation and Development cut its forecast for the eurozone this year to 0.8 per cent from 1.2 per cent in its May assessment.

The OECD also trimmed its 2014 outlook for Canada, to economic growth of 2.3 per cent from 2.5 per cent.