CANADA FX DEBT-C$ falls to 10-wk low after Progress deal breakdown

* C$ hits session low of C$0.9964 vs US$, or $1.0036
    * Blocked Petronas-Progress deal hurts sentiment
    * Bank of Canada eyed for rate tone change

    By Claire Sibonney
    TORONTO, Oct 22 (Reuters) - The Canadian dollar skidded to a
more than 10-week low against the U.S. currency on Monday, hurt
by a blocked energy sector takeover and expectations that the
central bank will drop its hawkish tone on interest rates on
    The federal government's shock decision to block Malaysian
state oil firm Petronas' C$5.17 billion bid for Progress Energy
 dented demand for the currency, which gains from
acquisition flows into the country. 
    Progress and Petronas have responded that they will try to
convince Canada to reverse its rejection of the takeover, and
will ask what they must do to get the deal back on track. 
    "There's still a 30-day appeal that can be done, but the
initial reaction was negative and adds to the recent pressure on
the Canadian dollar," said Matt Perrier, director of foreign
exchange sales at BMO Capital Markets.
    Analysts said Canada's dollar will feel longer-term pain
from the government's rejection of the deal, as a drop in merger
and acquisition activity hints that mining and energy companies
are off limits to some buyers. 
    "It's not just the actual impact of the dollars, it's the
whole psychology behind the sentiment, if people believe the
story then it has a bigger impact," said Camilla Sutton, chief
currency strategist at Scotiabank in Toronto, who nevertheless
is projecting the Canadian dollar to appreciate by year-end.
    At 3:08 p.m. (1808 GMT) the Canadian dollar was
trading at C$0.9950 to the greenback, or $1.0050, compared with
C$0.9932, or $1.0068, at Friday's North American close.
    Earlier, the Canadian dollar weakened as far as C$0.9964, or
$1.0036, its softest level since Aug. 10.
    BMO's Perrier said the next major level of support for the
Canadian dollar is around parity, which also marks the 100- and
200-day moving averages.
    The blocked deal could also signal tough times ahead for
Chinese oil group CNOOC's C$15.1 billion offer for oil
producer Nexen. 
    "Clearly, having one knockback heightens expectations of a
second," said Jeremy Stretch, head of foreign exchange strategy
at CIBC World Markets in London, adding that of more immediate
interest is a Bank of Canada rate decision due on Tuesday.
    While investors are not expecting a change in the key policy
rate any time soon, they will be closely watching to see if the
central bank drops language about an eventual rate hike, after
the bank's governor failed to mention it in a speech last week.
    A Reuters poll released on Thursday suggested the central
bank will postpone interest rate hikes until the fourth quarter
of next year and will likely water down, rather than eliminate,
its hawkish language. 
    Since Governor Mark Carney's speech last Monday, the
Canadian dollar has fallen nearly 2 percent. 
    Canadian bond prices were flat to lower across the curve,
outperforming U.S. Treasuries, except at the very long end.
    The two-year bond was up half a Canadian cent to
yield 1.085 percent, while the benchmark 10-year bond
 fell 23 Canadian cents to yield 1.870 percent. The
30-year bond was down 40 Canadian cents, yielding
2.447 percent.