CANADA FX DEBT-Loonie weakens as U.S. gov't remains closed

Wed Oct 2, 2013 4:42pm EDT

* C$ at C$1.0332 vs US$, or 96.79 U.S. cents
    * Day 2 of U.S. government shutdown spurs investor unease
    * Bond prices higher across curve


    By Leah Schnurr
    TORONTO, Oct 2 (Reuters) - The Canadian dollar weakened
against the greenback on Wednesday as a government shutdown in
the United States continued for a second day with few signs
lawmakers were making any progress.
    The political stalemate south of the border has prompted the
first U.S. federal government shutdown in 17 years, forcing
hundreds of thousands of employees to take unpaid leave, and
investors were concerned about what impact the impasse will have
on the still-fragile economic recovery. 
    Congressional leaders were scheduled to meet with President
Barack Obama later on Wednesday, though both sides said the
meeting was unlikely to end the shutdown. 
    Analysts said a shutdown that drags on longer than a few
days will start to bite into economic 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 ended the session at C$1.0332,
or 96.79 U.S. cents, weaker than Tuesday's close of C$1.0325, or
96.85 U.S. cents. 
    For the most part, the loonie has been trading in a range
since early September and analysts expect that to continue for
now. 
    "That C$1.03 range that we're sitting in right now arguably
looks like it's a limbo zone," said Ian Pollick, fixed income
strategist at RBC Capital Markets in Toronto. "A lot of people
are expecting that the shutdown isn't going to last too long."
    Still, 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.
    The next big political battle lawmakers face is raising the
$16.7 trillion U.S. debt ceiling by mid-October. Failure to do
so would force the United States to default on some payment
obligations, and the inability of U.S. politicians to end the
government shutdown has stoked concerns about their ability to
come to an agreement on debt.
    While the political wrangling has shifted some attention
away from monetary policy, analysts were also trying to gauge
what impact a lengthy shutdown might have on the U.S. Federal
Reserve's efforts to prop up the economy. 
    The central bank surprised markets last month by maintaining
the amount of assets it is buying in its stimulus program at $85
billion a month. Analysts were speculating that the fiscal drag
on the economy spurred by the shutdown could prevent the Fed
from reducing its bond purchases as soon as had been expected. 
    In a speech that did not touch on the outlook for the U.S.
economy or monetary policy, Fed Chairman Ben Bernanke said on
Wednesday the Fed is being careful not to place too great a
burden on smaller banks as it seeks to beef up regulation of the
financial system. 
    Separately, Boston Fed President Eric Rosengren said the
shutdown could delay the Fed's withdrawal of bond purchases
because the government is not producing official data on the
economy. 
    Prices for Canadian government bonds were higher across the
maturity curve. The two-year bond was up 2.8 Canadian
cents to yield 1.186 percent and the benchmark 10-year bond
 added 11 Canadian cents to yield 2.548 percent.
FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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