CANADA FX DEBT-C$ strengthens but move limited by U.S. stand-off

Thu Oct 3, 2013 5:12pm EDT

* C$ at C$1.0326 vs US$, or 96.84 U.S. cents
    * U.S. government shutdown enters third day
    * Bond prices mixed across curve

    By Solarina Ho
    TORONTO, Oct 3 (Reuters) - The Canadian dollar strengthened
modestly against the greenback on Thursday, though the political
stalemate in Washington kept it in its recent trading band.
    Lawmakers in the United States appeared no closer to
resolving the budget deadlock that has resulted in a partial
shutdown of the federal government, which was in its third day.
 
    Investors were concerned about what impact the impasse will
have on a 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.
    U.S. employment data, usually a key market mover, was due
out on Friday, but with the shutdown in effect the figures are
not expected to be released until the budget impasse is
resolved.
    "The Canadian dollar, much like most global currencies, is
playing a little bit of 'Waiting for Godot' if you will, in the
sense that if Godot is the U.S. nonfarm payrolls data," said
Brad Schruder, director of foreign exchange at BMO Capital
Markets.
    Following a brief spike after the U.S. Federal Reserve's
decision to stand pat on its economic stimulus program on Sept.
18, the Canadian dollar has been trading in a tight range.
    "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 closed at C$1.0326, or 96.84
U.S. cents, marginally stronger than Wednesday's close of
C$1.0332, or 96.79 U.S. cents.
    The currency is expected to trade between C$1.0320 and
C$1.0350 for the balance of the week, said Schruder, adding that
Ivey September manufacturing data for Canada on Friday could
give the currency a modest push. 
    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 released on Thursday
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, or 97.09 U.S. cents, in a month's time.
    Those polled expected the loonie to weaken to C$1.040 in the
next three months, and saw it holding at that level in six and
12 months from now. 
    The U.S. government shutdown this week has cast uncertainty
on two big 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.
    While the political wrangling has shifted some attention
away from monetary policy, analysts were trying to gauge what
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
asset 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 those bond
purchases as soon as had been expected. 
    Prices for Canadian government bonds were higher across the
maturity curve. The two-year bond rose 1.5 Canadian
cents to yield 1.180 percent, while the benchmark 10-year bond
 gained 6 Canadian cents to yield 2.541 percent.
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