CANADA FX DEBT-Loonie weakened by U.S. shutdown, China growth outlook

* C$ at C$1.0321 vs US$, or 96.89 U.S. cents
    * U.S. government shutdown enters second week
    * World Bank lowers China growth forecast
    * Bond prices rise across curve

    By Leah Schnurr
    TORONTO, Oct 7 (Reuters) - The Canadian dollar weakened on
Monday as a federal government shutdown in the United States
stretched into its second week with lawmakers no closer to an
agreement, and after the World Bank lowered its growth forecast
for China.
    A large drop in Canadian building permits in August briefly
took the loonie to a session low, though analysts cautioned the
data series is volatile. 
    The partial government shutdown south of the border that
started last week had no end in sight and was bringing lawmakers
closer to a separate and more crucial deadline to raise the U.S.
debt ceiling in order to avoid default. 
    Investors are concerned about what impact the budget
standoff will have on a still-fragile economic recovery in the
United States, Canada's largest trading partner.
    Markets have also been focused on when the Federal Reserve
will start to withdraw its economic stimulus efforts after the
central bank surprised investors with a decision to hold steady
last month. The government shutdown has thrown some doubt on how
soon the Fed will be able to pull back.
    "The longer the U.S. shutdown is prolonged, the weaker the
U.S. growth outlook and the more apt that the Fed is to refrain
from tapering," said Camilla Sutton, chief currency strategist
at Scotiabank in Toronto.
    The World Bank overnight cut its growth forecasts for
China's economy to 7.5 percent this year, down from its April
forecast of 8.3 percent and below the International Monetary
Fund's most recent forecast of 7.75 percent. 
    The World Bank said that the country's investment-heavy
stimulus had run its course and that policymakers must focus on
containing the growth of credit.
    The outlook of slower growth for China weighed on the
Canadian dollar because it points to weaker prospects for global
growth and suggests less potential demand for resources, a main
driver of the loonie. 
    "Canada is a very pro-cyclical currency, so it tends to
outperform in strong periods of growth," said Sutton.
    The Canadian dollar was at C$1.0321, or 96.89 U.S.
cents, weaker than Friday's close of C$1.0292, or 97.16 U.S.
cents. The Canadian currency earlier hit a session low of
    Following a brief spike after the Fed's decision to stand
pat on its economic stimulus program on Sept. 18, the Canadian
dollar has been trading in a tight range for several sessions.
    Analysts see the loonie trading in a range between
mid-C$1.02 and mid-C$1.03, baring a resolution or other
    The seasonally adjusted value of Canadian building permits
issued in August slumped 21.2 percent to C$6.34 billion ($6.16
billion), reversing July's 21.4 percent surge.
    Investors will get another look at the domestic housing
market on Tuesday when housing starts for September are
    Prices for Canadian government bonds were higher across the
maturity curve. The two-year bond rose 2-1/2 Canadian
cents to yield 1.177 percent, while the benchmark 10-year bond
 gained 28 Canadian cents to yield 2.549 percent.