CANADA FX DEBT-C$ firms to 1-week high; monetary policy in focus

Reuters

* C$ at C$1.0304 vs US$, or 97.05 U.S. cents

* Canadian bond prices higher across the maturity curve

By Leah Schnurr

TORONTO, Oct 17 (Reuters) - The Canadian dollar strengthened

to hit a more than one-week high on Thursday, with investors

dumping the greenback on expectations that the fallout from the

U.S. government shutdown will see the Federal Reserve keep its

economic stimulus in place.

U.S. lawmakers came to a last-minute agreement on Wednesday

night that ended a partial shutdown that started at the

beginning of the month and raised the debt ceiling, avoiding a

potential default. Still, the deal is only a temporary solution

and raises the possibility of another budget impasse in the new

year.

Investors were assessing how much of a bite the shutdown may

have taken out of U.S. economic growth. Canada's fortunes are

closely tied to its neighbor south of the border, which is its

largest trading partner.

Weaker growth prospects could mean the Fed will have to

maintain the pace of its $85 billion a month in asset purchases

longer than had been anticipated.

"Everyone is starting to believe that due to inefficient

economic growth, tapering will not be on the table any time

soon," said Dean Popplewell, chief currency strategist at OANDA.

The Canadian dollar was at C$1.0304 versus the U.S.

dollar, or 97.05 U.S. cents, stronger than Wednesday's close of

C$1.0334, or 96.77 U.S. cents. The loonie touched a session high

of C$1.0291.

The greenback tumbled 0.9 percent against a basket of

currencies. Expectations of a delay in reducing the Fed's

monetary policy tends to weigh on the dollar, partly because it

pushes expectations of an eventual interest rate increase out

further.

The release of a backlog of U.S. data that was postponed by

the shutdown - including September's jobs report - will be key

to assessing the Fed's likely path.

Investors were also digesting a promise from the Canadian

government that it will introduce legislation that will require

balanced budgets except during economic crises, as well as a

renewed pledge to balance its books by 2015.

"(That) certainly gives Canada some extra love out there,"

said Popplewell of the currency.

Government bond prices were higher across the maturity

curve. The two-year bond rose 3.5 Canadian cents to

yield 1.198 percent, while the benchmark 10-year bond

gained 24 Canadian cents to yield 2.585 percent.

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