CANADA FX DEBT-Loonie strengthens but U.S. budget fears curb trade

Reuters

* C$ at C$1.0303 versus US$, or 97.06 U.S. cents

* Worries over U.S. budget impasse keep C$ range-bound

* Bond prices higher across the curve

By Leah Schnurr

TORONTO, Sept 27 (Reuters) - The Canadian dollar

strengthened modestly against the greenback on Friday with

investors shying away from taking aggressive bets due to

uncertainty over whether U.S. lawmakers will be able to reach

agreements to prevent a government shutdown and a debt default.

The U.S. government was bracing for the possibility of a

partial shutdown of operations as of the start of October unless

a deal on funding is reached. There was still a chance of

averting a shutdown on Friday but time was running out.

The U.S. Congress is also facing a battle over raising the

government's debt ceiling to avoid a potential default on U.S.

government debt.

Investors are concerned about the ramifications of a

government shutdown and a possible debt default on a

still-fragile economic recovery in the United States, Canada's

largest trading partner.

"We're just treading water," said John Curran, senior vice

president at CanadianForex in Toronto.

"The market seems to be getting back to real fundamentals.

At the end of the day, what's bad for the States - something

like their fiscal situation - would pan out to be bad for

Canada."

The Canadian dollar was at C$1.0303, or 97.06 U.S.

cents, stronger than Thursday's close of C$1.0313, or 96.96 U.S.

cents.

Portfolio reshuffling heading into the end of the month and

the quarter could also lead to some gyrations in the loonie,

said Dean Popplewell, chief currency strategist at OANDA in

Toronto.

"There's certainly a demand for U.S. dollars on most

people's books, and you will probably see an unexplained price

movement toward owning U.S. dollars" that could lead to some

selling in the Canadian dollar, Popplewell said.

While the U.S. budget impasse has shifted some attention

away from the U.S. Federal Reserve's surprising recent decision

not to scale back its massive bond purchases, investors

continued to sift through policymakers' comments for insight on

when the Fed might begin its stimulus wind-down.

On Friday, two of the Fed's most dovish officials said the

central bank must be patient in deciding when to scale back bond

purchases.

The Canadian dollar hit a three-month high in the wake of

the Fed's decision last week, but has since pulled back.

With the importance the labor market plays in the direction

of monetary policy, attention was already turning to next week's

U.S. unemployment report. The economy is expected to have added

180,000 jobs in September, while the unemployment rate is seen

edging up to 7.3 percent.

At home, investors will be watching for Canadian monthly

gross domestic product figures, due on Monday. Economic growth

is expected to have rebounded in July after contracting the

previous month, hurt partly by floods in Alberta and a

construction workers' strike in Quebec.

Prices for Canadian government bonds were higher. The

two-year bond was up 4 Canadian cents to yield 1.201

percent and the benchmark 10-year bond rose 26

Canadian cents to yield 2.558 percent.

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