CANADA FX DEBT-Loonie weakens as U.S. government remains closed

Wed Oct 2, 2013 9:47am EDT
 
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* C$ at C$1.0341 vs US$, or 96.70 U.S. cents
    * Day two of U.S. government shut down prompts investor
unease
    * Fed Chairman Bernanke to speak in the afternoon
    * Bond prices higher across the curve

    By Leah Schnurr
    TORONTO, Oct 2 (Reuters) - The Canadian dollar weakened
modestly against the greenback on Wednesday as a government
shutdown in the United States began its second day with few
signs lawmakers were making any progress.
    A political stalemate between U.S. Democrats and Republicans
prompted the first federal government shutdown in 17 years,
forcing hundreds of thousands of employees to take unpaid leave.
Investors are concerned about the impact the impasse could have
on the still-fragile economic recovery. 
    While markets may be able to withstand a shutdown that lasts
only a few 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.
    "The longer this goes on, the weaker the U.S. economy is
going to end up being, and that's going to weigh on Canada as
well," said Benjamin Reitzes, senior economist and foreign
exchange strategist at BMO Capital Markets in Toronto.
    The Canadian dollar was at C$1.0341, or 96.70 U.S.
cents, weaker than Tuesday's close of C$1.0325, or 96.85 U.S.
cents. 
    The loonie has mostly been trading in a range since early
September and analysts expect that to continue for now. There is
technical resistance at C$1.0371 and support at C$1.0298,
Reitzes said. 
    The shutdown cast uncertainty on two other points of focus
for markets: the looming deadline to raise the U.S. debt ceiling
and what influence that could have on central bank policy.
    "It just pushes out any expected ... policy tightening of QE
tapering in the U.S. and eventual rate hikes in Canada," said
Reitzes.
    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 stoked concerns
about U.S. politicians' ability to come to any agreement.
    While the political wrangling has shifted some attention
away from monetary policy, analysts were also trying to gauge
what impact a lengthy shutdown could have on the Fed's current
efforts to prop up the economy. 
    The central bank surprised markets last month by maintaining
the amount of assets it is buying at $85 billion a month.
Analysts were speculating that fiscal drag on the economy could
prevent the Fed from reducing its bond purchases as soon as had
been expected. 
    Investors will be watching a speech from Fed Chairman Ben
Bernanke scheduled for this afternoon.
    Tuesday's comments from the Bank of Canada continued to
cause some weakness in the Canadian dollar after the central
bank cut its third-quarter economic growth forecast, suggesting
interest rates will stay low for some time. 
    Prices for Canadian government bonds were higher across the
maturity curve. The two-year bond was up 3.8 Canadian
cents to yield 1.181 percent and the benchmark 10-year bond
 added 16 Canadian cents to yield 2.542 percent.