CANADA FX DEBT-C$ ends weaker after central bank cuts growth outlook
* C$ at C$1.0325 vs US$, or 96.85 U.S. cents * Investors wary as U.S. federal government in partial shutdown * Bank of Canada sees 2-2.5 pct annualized growth in Q3 and Q4 * Bond prices mostly lower across the curve By Leah Schnurr TORONTO, Oct 1 (Reuters) - The Canadian dollar weakened on Tuesday after the Bank of Canada cut its third-quarter economic growth forecast and as a partial government shutdown began in the United States, the first in 17 years. The Bank of Canada's Senior Deputy Governor Tiff Macklem said the central bank now expects annualized growth in the third and fourth quarters to be in the 2 percent to 2.5 percent range before strengthening next year. The outlook points to interest rates remaining low. The central bank has held rates unchanged at 1 percent since September 2010. "We're definitely at a point where exports aren't developing and growing at the rate the Bank of Canada would like," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary. "What's really happened today is we got confirmation from the Bank of Canada that they will be on hold for longer than I think the markets had anticipated," he said. Adding to investor unease was a partial government shutdown south of the border as U.S. federal agencies 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 0.1 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. The Canadian dollar ended the session at C$1.0325, or 96.85 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 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 drawn-out shutdown could have on the Fed's current efforts to prop up the economy. The U.S. central bank surprised markets last month by holding the pace of its $85 billion a month in bond purchases steady. Given the uncertainty over fiscal policy, the Fed is unlikely to announce a reduction in purchases at its next meeting later this month, Smith added. "October at this point is definitely off the table and we're looking toward at least December, maybe even January 2014 now," Smith said. "Had the Fed moved to taper in September, we might be getting more of a shock than we are in the markets." The loonie for now is likely to trade in a range between the high C$1.03 level and the mid-C$1.02 area, he said. Prices for Canadian government bonds were mostly lower across the maturity curve. The two-year bond was down half a Canadian cent to yield 1.195 percent and the benchmark 10-year bond slipped 6 Canadian cents to yield 2.551 percent.
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