CANADA FX DEBT-C$ firms but kept to a range by U.S. budget woes
* C$ at C$1.0324 vs US$, or 96.86 U.S. cents * U.S. government shutdown enters third day * Bond prices mixed across curve By Leah Schnurr TORONTO, Oct 3 (Reuters) - The Canadian dollar strengthened modestly against the greenback on Thursday, though the political stalemate in Washington was expected to keep the loonie in its recent trading band. Lawmakers in the United States appeared no closer to resolving a budget deadlock that resulted in a partial shutdown of the federal government, now entering its third day. Investors were concerned about what impact the impasse will have on the still-fragile economic recovery. Analysts said a shutdown that drags on longer than a few days will start to bite into economic growth in the United States, Canada's biggest trading partner. Still, without a resolution or other catalyst, the Canadian dollar was seen sticking to recent levels. Following a brief spike after the U.S. Federal Reserve's decision to stand pat on its economic stimulus, the Canadian dollar has been trading in a tight range since late September. "We'll call it the eye of the storm," said Jack Spitz, managing director of foreign exchange at National Bank Financial in Toronto. "There's plenty of volatility around us, but it seems to be having a self-mitigating impact on dollar-Canada dollar." The Canadian dollar was at C$1.0324, or 96.86 U.S. cents, stronger than Wednesday's close of C$1.0332, or 96.79 U.S. cents. In the longer-term, the Canadian dollar is expected to lose ground against its U.S. counterpart in coming months, though economists forecast the currency will be more resilient than previously anticipated, a Reuters poll found. The median forecast of more than 50 economists and currency strategists was for the Canadian dollar to trade at C$1.030 to the U.S. dollar in one month, or 97.09 U.S. cents. Those polled expect the loonie will weaken to C$1.040 in the next three months, but see it then holding at that level six and 12 months from now. The U.S. government shutdown this week cast uncertainty on two other points of focus for markets: the looming deadline to raise the debt ceiling and its influence on central bank policy. The next big political battle lawmakers face is raising the $16.7 trillion U.S. debt ceiling by mid-October. Failure to do so would force the United States to default on some payment obligations, and the inability of U.S. politicians to end the government shutdown has stoked concerns about their ability to come to an agreement on debt. Both fiscal issues now appear set to merge into a more complex fight. While the political wrangling has shifted some attention away from monetary policy, analysts were also trying to gauge the effect a lengthy shutdown might have on the U.S. Federal Reserve's efforts to prop up the economy. The central bank surprised markets last month by maintaining assets buying in its stimulus program at $85 billion a month. Analysts were speculating the fiscal drag on the economy spurred by the shutdown could prevent the Fed from reducing its bond purchases as soon as had been expected. Prices for Canadian government bonds were mixed across the maturity curve. The two-year bond was up 0.2 of a Canadian cent to yield 1.187 percent, while the benchmark 10-year bond lost 10 Canadian cents to yield 2.561 percent.
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