CANADA FX DEBT-Loonie firms after GDP data, but U.S. shutdown eyed

* C$ at C$1.0289 versus US$, or 97.19  U.S. cents
    * GDP picks up in July; investors wary of U.S. budget battle
    * Bond prices rise across the curve

    By Leah Schnurr
    TORONTO, Sept 30 (Reuters) - The Canadian dollar firmed on
Monday after data showed the economy was slightly stronger than
expected in July, though investors had their attention south of
the border where the clock was ticking to avoid a U.S. federal
government shutdown.
    The Canadian economy grew at a 0.6 percent rate in July,
rebounding from a contraction the previous month as the recovery
was hurt by flooding in Alberta and a construction worker strike
in Quebec.
    Even with the improvement, however, the economy remains well
below the central bank's estimate of the potential growth in
    "Basically this was just a mirror image of the June
decline," said Doug Porter, chief economist at BMO Capital
Markets in Toronto. "The broader story is when we look past
those two volatile months, the economy is still just grinding
ahead at a relative sluggish pace." 
    The Canadian dollar was at C$1.0289, or 97.19 U.S.
cents, stronger than Friday's close of C$1.0303, or 97.06 U.S.
cents. The loonie had firmed to a session high of C$1.0276
shortly after the data was released, marking its highest level
in nearly a week.
    The looming possibility of a federal government shutdown in
the United States held markets' attention. If a stop-gap
spending bill for the new fiscal year is not passed before
midnight on Monday, government agencies and programs deemed
non-essential will begin closing their doors for the first time
in 17 years. 
    Investors are concerned about the impact such a shutdown
would have on the still-fragile U.S. economic recovery. The
uncertainty pushed the greenback down 0.5 percent against a
basket of currencies.
    The political battle also increased concerns about
lawmakers' ability to reach a deal to raise the debt ceiling by
mid-October. Failure to do so could cause the United States to
default on some payment obligations.  
    "The implications of a default on U.S. debt will have a far
more drastic effect on the market's psyche, and even though the
risk of default is minor, the ramifications of continued
saber-rattling from both sides of the aisle will be heightened
volatility across all markets and asset classes," Scott Smith,
senior market analyst at Cambridge Mercantile Group in Calgary,
wrote in a note.
     Prices for Canadian government bonds were higher across the
maturity curve. The two-year bond was up 1.7 Canadian
cent to yield 1.193 percent and the benchmark 10-year bond
 rose 10 Canadian cents to yield 2.547 percent.