CANADA FX DEBT-C$ firms but kept to a range by U.S. budget woes

Thu Oct 3, 2013 9:53am EDT

* C$ at C$1.0324 vs US$, or 96.86 U.S. cents
    * U.S. government shutdown enters third day
    * Bond prices mixed across curve

    By Leah Schnurr
    TORONTO, Oct 3 (Reuters) - The Canadian dollar strengthened
modestly against the greenback on Thursday, though the political
stalemate in Washington was expected to keep the loonie in its
recent trading band.
    Lawmakers in the United States appeared no closer to
resolving a budget deadlock that resulted in a partial shutdown
of the federal government, now entering its third day.
 
    Investors were concerned about what impact the impasse will
have on the still-fragile economic recovery. 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.
    Still, without a resolution or other catalyst, the Canadian
dollar was seen sticking to recent levels. Following a brief
spike after the U.S. Federal Reserve's decision to stand pat on
its economic stimulus, the Canadian dollar has been trading in a
tight range since late September.
    "We'll call it the eye of the storm," said Jack Spitz,
managing director of foreign exchange at National Bank Financial
in Toronto. "There's plenty of volatility around us, but it
seems to be having a self-mitigating impact on dollar-Canada
dollar."
    The Canadian dollar was at C$1.0324, or 96.86 U.S.
cents, stronger than Wednesday's close of C$1.0332, or 96.79
U.S. cents. 
    In the longer-term, the Canadian dollar is expected to lose
ground against its U.S. counterpart in coming months, though
economists forecast the currency will be more resilient than
previously anticipated, a Reuters poll found. 
    The median forecast of more than 50 economists and currency
strategists was for the Canadian dollar to trade at C$1.030 to
the U.S. dollar in one month, or 97.09 U.S. cents.
    Those polled expect the loonie will weaken to C$1.040 in the
next three months, but see it then holding at that level six and
12 months from now. 
    The U.S. government shutdown this week cast uncertainty on
two other points of focus for markets: the looming deadline to
raise the debt ceiling and its influence 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.
    Both fiscal issues now appear set to merge into a more
complex fight. 
    While the political wrangling has shifted some attention
away from monetary policy, analysts were also trying to gauge
the effect 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
assets buying in its stimulus program at $85 billion a month.
Analysts were speculating 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. 
    Prices for Canadian government bonds were mixed across the
maturity curve. The two-year bond was up 0.2 of a
Canadian cent to yield 1.187 percent, while the benchmark
10-year bond lost 10 Canadian cents to yield 2.561
percent.
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