CANADA FX DEBT-Canada dollar dips as U.S. government shutdown starts

Tue Oct 1, 2013 9:46am EDT
 
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* C$ at C$1.0312 vs US$, or 96.97 U.S. cents
    * Investors wary as U.S. federal government in partial
shutdown
    * Bond prices lower across the curve

    By Leah Schnurr
    TORONTO, Oct 1 (Reuters) - The Canadian dollar weakened
modestly against the greenback on Tuesday and was likely to stay
in a tight trading range as the U.S. government began a partial
shutdown for the first time in 17 years.
    Federal agencies south of the border were directed to cut
back services after lawmakers could not break a political
stalemate to keep government operations funded. 
    Investors are concerned about the impact such a shutdown
could have on the still-fragile U.S. economic recovery. The
uncertainty pushed the greenback down 0.3 percent against a
basket of currencies.
    While the markets may be able to shrug off a shutdown that
lasts only a couple of days, analysts say a closure that drags
on longer than that will start to bite into growth in the United
States, Canada's biggest trading partner.
    "What's negative for the U.S. growth outlook is also
negative for Canada," said Camilla Sutton, chief currency
strategist at Scotiabank in Toronto.
    The Canadian dollar was at C$1.0312, or 96.97 U.S.
cents, weaker than Monday's close of C$1.0303, or 97.06 U.S.
cents. 
    The shutdown also cast uncertainty on two other points of
focus for markets: the looming deadline to raise the U.S. debt
ceiling and the potential path of the Federal Reserve's economic
stimulus program.
    The next big political battle lawmakers face is raising the
$16.7 trillion debt ceiling by mid-October. Failure to do so
would force the United States to default on some payment
obligations, and Tuesday's government shutdown raised investors'
concerns about politicians' ability to come to an agreement.
    While the political wrangling has shifted some attention
away from monetary policy, analysts were also trying to gauge
what impact a drawn-out shutdown could have on the Fed's current
efforts to prop up the economy.
    The central bank surprised markets last month by holding the
pace of its $85 billion a month in bond purchases steady.
    "We know the Fed has already delayed tapering once on the
back of what could potentially happen in U.S. political
gridlock, so should this be a prolonged shutdown, that suggests
the Fed could delay again," said Sutton.
    At home, investors will be watching a speech from Bank of
Canada Senior Deputy Governor Tiff Macklem, scheduled for later
in the day.
    Prices for Canadian government bonds were lower across the
maturity curve. The two-year bond was down 1-1/2
Canadian cent to yield 1.200 percent and the benchmark 10-year
bond fell 11 Canadian cents to yield 2.557 percent.