CANADA FX DEBT-C$ hits two-month low after Progress deal blocked

* C$ at C$0.9942 vs US$, or $1.0058
    * Blocked Petronas-Progress deal hurts sentiment
    * Bank of Canada eyed for rate tone change

    By Alastair Sharp
    TORONTO, Oct 22 (Reuters) - The Canadian dollar hit a
two-month low against the U.S. currency on Monday, hurt by a
blocked energy sector takeover and as some traders bet that the
central bank will drop its hawkish tone on interest rates on
    The federal government's shock decision to block Malaysian
state oil firm Petronas' C$5.17 billion bid for Progress Energy
 took some shine off the currency, which gains from
acquisition flows into the country. 
    "It's certainly not helpful or encouraging," said Jeremy
Stretch, head of foreign exchange strategy at CIBC World Markets
in London. "It's indicative of the perception that Canada may
not quite be as open for business as some might hope or
    At 8:14 a.m. (1214 GMT) the Canadian dollar was
trading at C$0.9942 to the greenback, or $1.0058, compared with
C$0.9932, or $1.0068, at Friday's North American close.
    The Canadian currency also weakened against the euro, the
British pound and the Swiss franc.
    The blocked deal could also signal tough times ahead for
Chinese oil group CNOOC's C$15.1 billion offer for oil
producer Nexen. 
    "Clearly, having one knockback heightens expectations of a
second," CIBC's Stretch said, adding that of more immediate
interest is a Bank of Canada rate decision due on Tuesday.
    While investors aren't expecting a change in borrowing costs
any time soon, they will be closely watching to see if the
central bank drops language about an eventual rate hike, after
the bank's governor failed to mention it in a speech last week.
    A Reuters poll released on Thursday suggested the central
bank will postpone interest rate hikes until the fourth quarter
of next year and will likely water down, rather than eliminate,
its hawkish language. 
    Since Governor Mark Carney's speech last Monday, the
Canadian dollar has fallen 1.4 percent to its weakest since
    The price of government bonds was lower across the curve.
    The two-year bond was off 3 Canadian cents to
yield 1.100 percent, while the benchmark 10-year bond
 fell 38 Canadian cents to yield 1.886 percent.