CANADA FX DEBT-Loonie weakens on U.S. shutdown, wider trade deficit

* C$ at C$1.0328 vs US$, or 96.82 U.S. cents
    * Canada's trade deficit rises to C$1.31 billion
    * Bond prices lower across curve

    By Leah Schnurr
    TORONTO, Oct 8 (Reuters) - The Canadian dollar weakened
against the greenback on Tuesday after the trade deficit widened
more than expected in August and as the government shutdown
south of the border dragged on, though there were faint signs of
hope for a resolution.
    Canada's trade deficit rose to C$1.31 billion ($1.27
billion) as imports grew to set a record. The data offset an
earlier, more upbeat report that showed housing starts jumped in
    "Exports are a large part of the Canadian economy and they
are really going to underpin the recovery for us," said Scott
Smith, senior market analyst at Cambridge Mercantile Group in
    "So, if they are not progressing as fast or as well as we'd
like, then we're going to see some loonie selling on the
prospects moving forward for the whole economy."
    Because of the role it plays in the economy, the export
sector is also a significant focal point for the Bank of Canada
in terms of when the central bank will raise interest rates,
said Smith.
    The Bank of Canada earlier in the month cut its
third-quarter economic growth forecast and said the export
sector might recover more slowly than expected.
    The Canadian dollar was at C$1.0328, or 96.82 U.S.
cents, weaker than Monday's close of C$1.0313, or 96.96 U.S.
cents. The Canadian currency briefly hit a session high of
C$1.0308 shortly after the housing data.
    The partial government shutdown south of the border that
started last week also strained markets as the impasse brought 
lawmakers closer to a separate and more crucial deadline to
raise the U.S. debt ceiling in order to avoid default.
    But some hope emerged with President Barack Obama saying he
would accept a short-term increase in the nation's borrowing
authority to prevent a default. 
    The United States has until mid-October before it hits the
$16.7 trillion borrowing limit. The impasse was reminiscent of
the 2011 showdown over the debt ceiling, which yielded an
agreement only at the last minute.
    "With markets looking back at 2011 and saying an
eleventh-hour deal was done then, expectations are we'll get
something hammered out before Oct. 17," said Smith.
    Following a brief spike after the Federal Reserve's decision
to stand pat on its economic stimulus on Sept. 18, the Canadian
dollar has been trading in a tight range for several sessions.
    Analysts see the loonie in a range between mid-C$1.02 and
mid-C$1.03 for now, baring a resolution or other catalyst.
    Prices for Canadian government bonds were lower across the
maturity curve. The two-year bond slipped half a
Canadian cent to yield 1.190 percent, while the benchmark
10-year bond fell 6 Canadian cents to yield 2.577