CANADA FX DEBT-C$ hits one-week high as U.S. cuts debt ceiling deal

* C$ at C$1.0334 vs US$, or 96.77 U.S. cents
    * Canadian bond prices rise across the curve

    By Leah Schnurr
    TORONTO, Oct 16 (Reuters) - The Canadian dollar strengthened
to its highest level in a week on Wednesday as U.S. Senate
leaders announced a last-minute deal to raise the government's
borrowing limit that would avoid a potential debt default.
    The deal would also reopen the U.S. government after a
partial shutdown that began at the start of the month when
politicians failed to reach a budget agreement. 
    Even so, the plan, which needs approval by both the Senate
and the House of Representatives, only offers a temporary
solution that could lead to another fiscal showdown early next
    The down-to-the-wire nature of the negotiations was
reminiscent of the debt ceiling debate in 2011 when a deal was
also reached at the last minute. Investors had speculated an
agreement would also be forthcoming this time around, and
markets reacted positively to the deal.
    "That's what people want to see, (things) back on track,"
said Don Mikolich, executive director of foreign exchange sales
at CIBC World Markets in Toronto. "Start to get some economic
data out, the government functioning -- things that are good for
growth instead of causing this delay and uncertainty."
    The United States is Canada's largest export market and the
prospect of slowing growth there weighed on the loonie.
    The Canadian dollar ended the session at C$1.0334
versus the U.S. dollar, or 96.77 U.S. cents, stronger than
Tuesday's close at C$1.0380, or 96.34 U.S. cents. The loonie
touched a session high of C$1.0327.
    Once the dust has cleared from the fiscal standoff, the
market's attention will return to when the Federal Reserve will
start to reduce the scale of its economic stimulus. The release
of a backlog of U.S. data that was postponed by the shutdown
will be key to assessing the Fed's likely path.
    "People had forgotten about the Fed and tapering somewhere
in all this," said Mikolich. "That's the next little bit of
uncertainty, the market doesn't actually know what's next on the
monetary side of things."
    Domestically, data showed Canadian manufacturing sales
unexpectedly fell in August, likely dampening economic growth in
the month. 
    Government bond prices were higher across the maturity
curve. The two-year bond rose 5 Canadian cents to
yield 1.209 percent, while the benchmark 10-year bond
 gained 25 Canadian cents to yield 2.618 percent.
    But Canadian treasury bills and government bonds
underperformed their U.S. counterparts, which rallied on news of
a deal. 
    The spread between what Canadian and U.S. one-year T-bills
yield widened to 89 basis points from 86 basis points on
Tuesday, as investors demanded more of a premium to lend to