CANADA FX DEBT-C$ firms but kept to a range by U.S. budget woes

Reuters

* C$ at C$1.0324 vs US$, or 96.86 U.S. cents

* U.S. government shutdown enters third day

* Bond prices mixed across curve

By Leah Schnurr

TORONTO, Oct 3 (Reuters) - The Canadian dollar strengthened

modestly against the greenback on Thursday, though the political

stalemate in Washington was expected to keep the loonie in its

recent trading band.

Lawmakers in the United States appeared no closer to

resolving a budget deadlock that resulted in a partial shutdown

of the federal government, now entering its third day.

Investors were concerned about what impact the impasse will

have on the still-fragile economic recovery. Analysts said a

shutdown that drags on longer than a few days will start to bite

into economic growth in the United States, Canada's biggest

trading partner.

Still, without a resolution or other catalyst, the Canadian

dollar was seen sticking to recent levels. Following a brief

spike after the U.S. Federal Reserve's decision to stand pat on

its economic stimulus, the Canadian dollar has been trading in a

tight range since late September.

"We'll call it the eye of the storm," said Jack Spitz,

managing director of foreign exchange at National Bank Financial

in Toronto. "There's plenty of volatility around us, but it

seems to be having a self-mitigating impact on dollar-Canada

dollar."

The Canadian dollar was at C$1.0324, or 96.86 U.S.

cents, stronger than Wednesday's close of C$1.0332, or 96.79

U.S. cents.

In the longer-term, the Canadian dollar is expected to lose

ground against its U.S. counterpart in coming months, though

economists forecast the currency will be more resilient than

previously anticipated, a Reuters poll found.

The median forecast of more than 50 economists and currency

strategists was for the Canadian dollar to trade at C$1.030 to

the U.S. dollar in one month, or 97.09 U.S. cents.

Those polled expect the loonie will weaken to C$1.040 in the

next three months, but see it then holding at that level six and

12 months from now.

The U.S. government shutdown this week cast uncertainty on

two other points of focus for markets: the looming deadline to

raise the debt ceiling and its influence on central bank policy.

The next big political battle lawmakers face is raising the

$16.7 trillion U.S. debt ceiling by mid-October. Failure to do

so would force the United States to default on some payment

obligations, and the inability of U.S. politicians to end the

government shutdown has stoked concerns about their ability to

come to an agreement on debt.

Both fiscal issues now appear set to merge into a more

complex fight.

While the political wrangling has shifted some attention

away from monetary policy, analysts were also trying to gauge

the effect a lengthy shutdown might have on the U.S. Federal

Reserve's efforts to prop up the economy.

The central bank surprised markets last month by maintaining

assets buying in its stimulus program at $85 billion a month.

Analysts were speculating the fiscal drag on the economy spurred

by the shutdown could prevent the Fed from reducing its bond

purchases as soon as had been expected.

Prices for Canadian government bonds were mixed across the

maturity curve. The two-year bond was up 0.2 of a

Canadian cent to yield 1.187 percent, while the benchmark

10-year bond lost 10 Canadian cents to yield 2.561

percent.

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