CANADA FX DEBT-C$ weakens for second day as Fed, budget issues eyed

Wed Sep 25, 2013 9:54am EDT

* C$ at C$1.0311 against U.S. dollar
    * U.S. budget, Fed tapering uncertainty remain in focus
    * Bond prices mixed across the curve

    By Leah Schnurr
    TORONTO, Sept 25 (Reuters) - The Canadian dollar weakened
for a second day on Wednesday as a lack of domestic catalysts
turned investors' focus to the path of monetary policy in the
United States and a potential government shutdown in the world's
biggest economy.
    After the Federal Reserve's recent unexpected decision to
maintain the pace of its stimulative bond-buying program,
investors have sought insight, on how long the stimulus will
continue, from the comments of several Fed policymakers.
    With more officials scheduled to speak through the rest of
the week and no major Canadian economic data on tap, the
question of when the Fed will reduce its massive economic
stimulus is likely to hold the market's attention.
    "We're focused on the States and Fed tapering prospects, and
how those evolve is really going to be what drives the Canadian
dollar," said Benjamin Reitzes, senior economist and foreign
exchange strategist at BMO Capital Markets.
    The Fed's next meeting in October may be too soon for the
Fed to announce a pull back as it won't give policymakers enough
time to get much more economic data, said Reitzes.
    "December seems like the better bet, assuming the economic
data picks up to some extent because the Fed does want to see
things improve."
    The Fed is currently buying $85 billion in bonds a month to
keep borrowing costs low and prop up the economic recovery. The
Canadian dollar touched a three-month high in the wake of the
Fed's decision to stand pat, but has since pulled back.
    The Canadian dollar was at C$1.0311 to the U.S.
dollar, or 96.98 U.S. cents, weaker than Tuesday's session close
of C$1.0302, or 97.07 U.S. cents. 
    Investors were also turning their attention to U.S. budget
concerns. 
    A vote is due in the U.S. Senate later on a motion that will
allow the government to keep running beyond the end of the month
when budgets are due to expire, with a marathon attack on
Obamacare overnight by Republican Senator Ted Cruz delaying
consideration of the stop-gap funding measure. 
    Separately, another political battle over raising the debt
ceiling looms before long. Failure to increase the $16.7
trillion borrowing limit could force the U.S. to begin
defaulting on its obligations. 
    "The debt ceiling looks like it will be a little bit more
acrimonious," said Reitzes.
    "It will probably go down to the wire but I would hope that
things at least move in the right direction. We're not really
sure what would happen if they didn't raise the debt ceiling, we
haven't gone down that road before, but I can't imagine it would
 be at all positive for financial markets."
    The last debt ceiling fight in 2011 saw a solution reached
only at the last minute and led to a ratings downgrade from
Standard and Poor's. 
    Prices for Canadian government bonds were mixed across the
maturity curve, with the two-year bond off a cent to
yield 1.213 percent. The benchmark 10-year bond rose
7 Canadian cents to yield 2.592 percent.
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