CANADA FX DEBT-C$ recovers from 10-week low before rate decision

* C$ ends at C$0.9926 vs US$, or $1.0075
    * Off day's low of C$0.9964 vs US$, or $1.0036
    * Blocked Petronas-Progress deal hurts market sentiment
    * Bank of Canada eyed for rate tone change

    By Claire Sibonney
    TORONTO, Oct 22 (Reuters) - The Canadian dollar hit a more
than 10-week low against the U.S. currency on Monday, hurt by a
blocked foreign takeover in the energy sector and expectations
the Bank of Canada will drop its hawkish tone on interest rates
on Tuesday, but the currency recovered late in the day and
closed slightly higher.
    The Canadian government's shock decision to block Malaysian
state oil firm Petronas's C$5.17 billion bid for Progress Energy
 dented demand for the currency, which gains from
acquisition flows into the country. 
    Progress and Petronas said they will try to persuade the
government to reverse its rejection, and ask it what they must
do to get the deal back on track. 
    "We certainly digested the news late Friday of the blocking
of the Progress Energy deal...I think the market is now waiting
for the Bank of Canada tomorrow morning," said Matt Perrier,
director of foreign exchange sales at BMO Capital Markets.
     While investors are not expecting a change in the central
bank's key policy rate any time soon, they will be watching
closely to see if the bank drops language on Tuesday about the
necessity an eventual rate hike after bank Governor Mark Carney
failed to make mention of that stance in a speech last week. 
    "There's still a 30-day appeal (of the Petronas decision) 
that can be done, but the initial reaction was negative and adds
to the recent pressure on the Canadian dollar that originated a
week ago on the back of Mark Carney's speech."
    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 Carney's speech last Monday, the Canadian dollar has
fallen more than 1 percent. 
    The Canadian dollar ended the North American
session at C$0.9926 to the greenback, or $1.0075, up slightly
from Friday's close of C$0.9932, or $1.0068.
    Earlier, the Canadian dollar fell to C$0.9964, or $1.0036,
its weakest 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.
    Analysts said Canada's dollar will feel longer-term pain
from the rejection of the Progress Energy deal, which hinted
that Canadian mining and energy companies are off limits to some
buyers and may result in a drop in merger and acquisition
    "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.
    The blocked deal could also signal tough times ahead for
Chinese state-owned 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.
    Canadian bond prices were mostly lower but outperformed U.S.
    The two-year bond was up 2 Canadian cents to
yield 1.095 percent, while the benchmark 10-year bond
 fell 30 Canadian cents to yield 1.877 percent. The
30-year bond was down 45 Canadian cents, yielding
2.449 percent.