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 higher across curve

    By Leah Schnurr
    TORONTO, Oct 7 (Reuters) - The Canadian dollar weakened on
Monday as a U.S. federal government shutdown 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. 
    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.
    "It's at the point now where they're obviously negotiating
the whole fiscal picture - the debt ceiling, plus the spending,"
said Don Mikolich, executive director of foreign exchange sales
at CIBC World Markets in Toronto.
    "It's leading some to wonder whether tapering is due to be
pushed out much further to the end of the year or potentially
into the new year." 
    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 major
driver of the loonie. 
    The Canadian dollar ended the session at C$1.0313,
or 96.96 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 C$1.0334.
    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
    "There's not a lot of flows in the market given that we're
so range-bound," said Mikolich. 
    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 half a
Canadian cent to yield 1.187 percent, while the benchmark
10-year bond gained 12 Canadian cents to yield 2.569