CANADA FX DEBT-Loonie weakens as U.S. government remains closed
* C$ at C$1.0341 vs US$, or 96.70 U.S. cents * Day two of U.S. government shut down prompts investor unease * Fed Chairman Bernanke to speak in the afternoon * Bond prices higher across the curve By Leah Schnurr TORONTO, Oct 2 (Reuters) - The Canadian dollar weakened modestly against the greenback on Wednesday as a government shutdown in the United States began its second day with few signs lawmakers were making any progress. A political stalemate between U.S. Democrats and Republicans prompted the first federal government shutdown in 17 years, forcing hundreds of thousands of employees to take unpaid leave. Investors are concerned about the impact the impasse could have on the still-fragile economic recovery. While markets may be able to withstand a shutdown that lasts only a few days, analysts say a closure that drags on longer than that will start to bite into growth in the United States, Canada's biggest trading partner. "The longer this goes on, the weaker the U.S. economy is going to end up being, and that's going to weigh on Canada as well," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets in Toronto. The Canadian dollar was at C$1.0341, or 96.70 U.S. cents, weaker than Tuesday's close of C$1.0325, or 96.85 U.S. cents. The loonie has mostly been trading in a range since early September and analysts expect that to continue for now. There is technical resistance at C$1.0371 and support at C$1.0298, Reitzes said. The shutdown cast uncertainty on two other points of focus for markets: the looming deadline to raise the U.S. debt ceiling and what influence that could have on central bank policy. "It just pushes out any expected ... policy tightening of QE tapering in the U.S. and eventual rate hikes in Canada," said Reitzes. The next big political battle lawmakers face is raising the $16.7 trillion debt ceiling by mid-October. Failure to do so would force the United States to default on some payment obligations and Tuesday's government shutdown stoked concerns about U.S. politicians' ability to come to any agreement. While the political wrangling has shifted some attention away from monetary policy, analysts were also trying to gauge what impact a lengthy shutdown could have on the Fed's current efforts to prop up the economy. The central bank surprised markets last month by maintaining the amount of assets it is buying at $85 billion a month. Analysts were speculating that fiscal drag on the economy could prevent the Fed from reducing its bond purchases as soon as had been expected. Investors will be watching a speech from Fed Chairman Ben Bernanke scheduled for this afternoon. Tuesday's comments from the Bank of Canada continued to cause some weakness in the Canadian dollar after the central bank cut its third-quarter economic growth forecast, suggesting interest rates will stay low for some time. Prices for Canadian government bonds were higher across the maturity curve. The two-year bond was up 3.8 Canadian cents to yield 1.181 percent and the benchmark 10-year bond added 16 Canadian cents to yield 2.542 percent.
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