CANADA FX DEBT-C$ rally pauses, but gains for third straight week
* Canadian dollar at C$1.2911, or 77.45 U.S. cents * Bond prices mostly lower across the maturity curve (Adds quote, details; updates prices) By Leah Schnurr OTTAWA, Oct 16 (Reuters) - The Canadian dollar weakened against the greenback on Friday as an increase in the price of oil failed to convince investors to continue the recent rally in the commodity-sensitive currency. The loonie, as Canada's currency is colloquially known, was up 0.2 percent on the week, helped by investor concerns that weak economic conditions will convince the U.S Federal Reserve not to raise rates this year. Over the past year, the currency has been badly hit by the drop in the price of oil, a major export for Canada. But the Canadian dollar has not traded as closely with oil in recent sessions and is up 3 percent since the start of October. "I personally think the rally was overextended and now it's a little bit of a return to reality," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. Anderson said the loonie is in the short-term over-valued compared to commodity prices and expects fundamental factors to cause it to weaken to C$1.31 by the middle of next week. The Canadian dollar ended the North American trading session at C$1.2911 to the greenback, or 77.45 U.S. cents, weaker than Thursday's close of C$1.2847, or 77.84 U.S. cents. The loonie heads into next week with a number of potential risk factors, chiefly a federal election on Monday and a Bank of Canada interest rate decision on Wednesday. In the last leg of the closely-fought election race, incumbent Conservative Prime Minister Stephen Harper is currently second in the polls, not far behind the Liberal party led by Justin Trudeau, son of a former prime minister. "Transitions of government cause uncertainty," said Anderson. "For currencies with current account deficits that need to be funded by foreign investors, uncertainty is a net negative for the currency." Two days after the election, the Bank of Canada is widely expected to hold interest rates at 0.50 percent. The central bank has cut rates twice this year to help buffer the impact of cheaper oil on the economy. Canadian government bond prices were mostly lower across the maturity curve, although the two-year added half a Canadian cent to yield 0.535 percent, while the benchmark 10-year rose 25 Canadian cents to yield 1.469 percent. (Additional reporting by Alastair Sharp in Toronto; Editing by Chris Reese)
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