CANADA FX DEBT-Loonie strengthens but U.S. budget fears curb trade

Fri Sep 27, 2013 4:45pm EDT

* C$ at C$1.0303 versus US$, or 97.06 U.S. cents
    * Worries over U.S. budget impasse keep C$ range-bound
    * Bond prices higher across the curve


    By Leah Schnurr
    TORONTO, Sept 27 (Reuters) - The Canadian dollar
strengthened modestly against the greenback on Friday with
investors shying away from taking aggressive bets due to
uncertainty over whether U.S. lawmakers will be able to reach
agreements to prevent a government shutdown and a debt default.
    The U.S. government was bracing for the possibility of a
partial shutdown of operations as of the start of October unless
a deal on funding is reached. There was still a chance of
averting a shutdown on Friday but time was running out.
 
    The U.S. Congress is also facing a battle over raising the
government's debt ceiling to avoid a potential default on U.S.
government debt.
    Investors are concerned about the ramifications of a
government shutdown and a possible debt default on a
still-fragile economic recovery in the United States, Canada's
largest trading partner.
    "We're just treading water," said John Curran, senior vice
president at CanadianForex in Toronto.
    "The market seems to be getting back to real fundamentals.
At the end of the day, what's bad for the States - something
like their fiscal situation - would pan out to be bad for
Canada."
    The Canadian dollar was at C$1.0303, or 97.06 U.S.
cents, stronger than Thursday's close of C$1.0313, or 96.96 U.S.
cents. 
    Portfolio reshuffling heading into the end of the month and
the quarter could also lead to some gyrations in the loonie,
said Dean Popplewell, chief currency strategist at OANDA in
Toronto.
    "There's certainly a demand for U.S. dollars on most
people's books, and you will probably see an unexplained price
movement toward owning U.S. dollars" that could lead to some
selling in the Canadian dollar, Popplewell said. 
    While the U.S. budget impasse has shifted some attention
away from the U.S. Federal Reserve's surprising recent decision
not to scale back its massive bond purchases, investors
continued to sift through policymakers' comments for insight on
when the Fed might begin its stimulus wind-down.
    On Friday, two of the Fed's most dovish officials said the
central bank must be patient in deciding when to scale back bond
purchases. 
    The Canadian dollar hit a three-month high in the wake of
the Fed's decision last week, but has since pulled back.
    With the importance the labor market plays in the direction
of monetary policy, attention was already turning to next week's
U.S. unemployment report. The economy is expected to have added
180,000 jobs in September, while the unemployment rate is seen
edging up to 7.3 percent.
    At home, investors will be watching for Canadian monthly
gross domestic product figures, due on Monday. Economic growth
is expected to have rebounded in July after contracting the
previous month, hurt partly by floods in Alberta and a
construction workers' strike in Quebec.
     Prices for Canadian government bonds were higher. The
two-year bond was up 4 Canadian cents to yield 1.201
percent and the benchmark 10-year bond rose 26
Canadian cents to yield 2.558 percent.
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