CANADA FX DEBT-Loonie weakened by U.S. shutdown, China growth outlook
* C$ at C$1.0321 vs US$, or 96.89 U.S. cents * U.S. government shutdown enters second week * World Bank lowers China growth forecast * Bond prices rise across curve By Leah Schnurr TORONTO, Oct 7 (Reuters) - The Canadian dollar weakened on Monday as a federal government shutdown in the United States stretched into its second week with lawmakers no closer to an agreement, and after the World Bank lowered its growth forecast for China. A large drop in Canadian building permits in August briefly took the loonie to a session low, though analysts cautioned the data series is volatile. The partial government shutdown south of the border that started last week had no end in sight and was bringing lawmakers closer to a separate and more crucial deadline to raise the U.S. debt ceiling in order to avoid default. Investors are concerned about what impact the budget standoff will have on a still-fragile economic recovery in the United States, Canada's largest trading partner. Markets have also been focused on when the Federal Reserve will start to withdraw its economic stimulus efforts after the central bank surprised investors with a decision to hold steady last month. The government shutdown has thrown some doubt on how soon the Fed will be able to pull back. "The longer the U.S. shutdown is prolonged, the weaker the U.S. growth outlook and the more apt that the Fed is to refrain from tapering," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. The World Bank overnight cut its growth forecasts for China's economy to 7.5 percent this year, down from its April forecast of 8.3 percent and below the International Monetary Fund's most recent forecast of 7.75 percent. The World Bank said that the country's investment-heavy stimulus had run its course and that policymakers must focus on containing the growth of credit. The outlook of slower growth for China weighed on the Canadian dollar because it points to weaker prospects for global growth and suggests less potential demand for resources, a main driver of the loonie. "Canada is a very pro-cyclical currency, so it tends to outperform in strong periods of growth," said Sutton. The Canadian dollar was at C$1.0321, or 96.89 U.S. cents, weaker than Friday's close of C$1.0292, or 97.16 U.S. cents. The Canadian currency earlier hit a session low of C$1.0334. Following a brief spike after the Fed's decision to stand pat on its economic stimulus program on Sept. 18, the Canadian dollar has been trading in a tight range for several sessions. Analysts see the loonie trading in a range between mid-C$1.02 and mid-C$1.03, baring a resolution or other catalyst. The seasonally adjusted value of Canadian building permits issued in August slumped 21.2 percent to C$6.34 billion ($6.16 billion), reversing July's 21.4 percent surge. Investors will get another look at the domestic housing market on Tuesday when housing starts for September are released. Prices for Canadian government bonds were higher across the maturity curve. The two-year bond rose 2-1/2 Canadian cents to yield 1.177 percent, while the benchmark 10-year bond gained 28 Canadian cents to yield 2.549 percent.