CANADA FX DEBT-C$ stronger after initial weakness following Liberal victory
* Canadian dollar at C$1.2981, or 77.04 U.S. cents * Bond prices lower across the maturity curve By Alastair Sharp TORONTO, Oct 20 (Reuters) - The Canadian dollar strengthened on Tuesday after voters elected a majority Liberal government that pledged to spend money to stimulate growth, which could limit the need for the Bank of Canada to cut interest rates. Liberal leader Justin Trudeau rode a late campaign surge to a stunning election victory on Monday, toppling the incumbent Conservatives with a far more resounding victory than polls had indicated. During the campaign, Trudeau pledged to run a C$10 billion annual budget deficit for three years to invest in infrastructure and help stimulate Canada's anemic economic growth. "The fiscal-monetary mix is going to be potentially slightly different than has been the case and would have been the case under another Harper administration," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London. At 9:23 a.m. ET (1323 GMT), the Canadian dollar was trading at C$1.2981 to the greenback, or 77.04 U.S. cents, stronger than Monday's close of C$1.3019, or 76.81 U.S. cents. It also gained against most of its other key peers. The prospect of a new government had weighed on the Canadian dollar immediately following the election results, with currency weakening to as low as C$1.3048, or 76.64 U.S. cents. While some analysts said the uncertainty of a new government weighed on the currency, they also noted things were more certain than if it had been a minority government, and that energy and commodity prices were a major influence. "We'll continue to trade Canada as a commodities currency more than any other factor," said Bart Wakabayashi, head of foreign exchange for State Street Global Markets in Tokyo. "That link is very hard to shake off and will continue to dominate dollar/CAD direction." Stretch said the currency would likely weaken through the remainder of the year, perhaps as high as C$1.36 to the greenback, given the U.S. economy appears to be growing faster than Canada's and its central bank is closing to raising rates. "There is still a risk that we see another squeeze higher in terms of dollar/Canada over the next three months, but that's more a function of the U.S. side of the equation," he said. RBC Capital Markets analysts said the response to the election results was muted and the likely looser fiscal stance would not have a long-term impact on the currency. They saw the currency trading between C$1.2960 and C$1.3040 during the session. Canadian government bond prices were lower, with the two-year down 4.5 Canadian cents to yield 0.548 percent and the benchmark 10-year fell 59 Canadian cents to yield 1.520 percent. Spreads to U.S. Treasuries were little changed even with the new government's plan to run deficits. (With additional reporting by Lisa Twaronite in Tokyo; Editing by Nick Zieminski)
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