CANADA FX DEBT-Canada dollar flat as possible U.S. shutdown offsets GDP

* C$ at C$1.0303 vs US$, or 97.06 U.S. cents
    * GDP picks up in July; investors wary of U.S. budget battle
    * Bond prices rise across the curve

    By Leah Schnurr
    TORONTO, Sept 30 (Reuters) - The Canadian dollar was
unchanged on Monday, giving back earlier gains on
better-than-expected economic growth as investors focused on
events south of the border where the clock was ticking to avoid
a U.S. federal government shutdown.
    The Canadian economy grew by 0.6 percent in July, rebounding
from a contraction the previous month when the recovery was hurt
by flooding in Alberta and a construction worker strike in
    Even with the improvement, the economy remains well below
the central bank's estimate of the potential growth in output.
    "Basically, this was just a mirror image of the June
decline," said Doug Porter, chief economist at BMO Capital
Markets in Toronto. "The broader story is when we look past
those two volatile months, the economy is still just grinding
ahead at a relatively sluggish pace." 
    The Canadian dollar ended the session at C$1.0303,
or 97.06 U.S. cents, unchanged from Friday's close. The loonie
earlier traded as high as C$1.0275, marking its strongest level
in nearly a week.
    But investors shied away from taking aggressive bets as the
possibility of a federal government shutdown in the United
States drew closer. 
    If a stop-gap spending bill for the new fiscal year is not
passed before midnight on Monday, government agencies and
programs deemed non-essential will begin closing their doors for
the first time in 17 years. 
    Investors are concerned about the impact such a shutdown
would 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, investors are unlikely to be able
to withstand something longer, said Don Mikolich, executive
director of foreign exchange sales at CIBC World Markets.
    "Because of the economic linkages, any kind of slowdown in
the U.S. as a result of the government shutdown would eventually
feed through to be negative for Canada," he said.
    The political battle also increased concerns about
lawmakers' ability to reach a deal to raise the debt ceiling by
mid-October. Failure to do so could cause the United States to
default on some payment obligations.  
    Prices for Canadian government bonds were higher across the
maturity curve. The two-year bond was up 2.2 Canadian
cents to yield 1.190 percent and the benchmark 10-year bond
 rose 15 Canadian cents to yield 2.541 percent.