CANADA FX DEBT-Loonie weakened by U.S. shutdown, China growth outlook

Reuters

* C$ at C$1.0321 vs US$, or 96.89 U.S. cents

* U.S. government shutdown enters second week

* World Bank lowers China growth forecast

* Bond prices rise across curve

By Leah Schnurr

TORONTO, Oct 7 (Reuters) - The Canadian dollar weakened on

Monday as a federal government shutdown in the United States

stretched into its second week with lawmakers no closer to an

agreement, and after the World Bank lowered its growth forecast

for China.

A large drop in Canadian building permits in August briefly

took the loonie to a session low, though analysts cautioned the

data series is volatile.

The partial government shutdown south of the border that

started last week had no end in sight and was bringing lawmakers

closer to a separate and more crucial deadline to raise the U.S.

debt ceiling in order to avoid default.

Investors are concerned about what impact the budget

standoff will have on a still-fragile economic recovery in the

United States, Canada's largest trading partner.

Markets have also been focused on when the Federal Reserve

will start to withdraw its economic stimulus efforts after the

central bank surprised investors with a decision to hold steady

last month. The government shutdown has thrown some doubt on how

soon the Fed will be able to pull back.

"The longer the U.S. shutdown is prolonged, the weaker the

U.S. growth outlook and the more apt that the Fed is to refrain

from tapering," said Camilla Sutton, chief currency strategist

at Scotiabank in Toronto.

The World Bank overnight cut its growth forecasts for

China's economy to 7.5 percent this year, down from its April

forecast of 8.3 percent and below the International Monetary

Fund's most recent forecast of 7.75 percent.

The World Bank said that the country's investment-heavy

stimulus had run its course and that policymakers must focus on

containing the growth of credit.

The outlook of slower growth for China weighed on the

Canadian dollar because it points to weaker prospects for global

growth and suggests less potential demand for resources, a main

driver of the loonie.

"Canada is a very pro-cyclical currency, so it tends to

outperform in strong periods of growth," said Sutton.

The Canadian dollar was at C$1.0321, or 96.89 U.S.

cents, weaker than Friday's close of C$1.0292, or 97.16 U.S.

cents. The Canadian currency earlier hit a session low of

C$1.0334.

Following a brief spike after the Fed's decision to stand

pat on its economic stimulus program on Sept. 18, the Canadian

dollar has been trading in a tight range for several sessions.

Analysts see the loonie trading in a range between

mid-C$1.02 and mid-C$1.03, baring a resolution or other

catalyst.

The seasonally adjusted value of Canadian building permits

issued in August slumped 21.2 percent to C$6.34 billion ($6.16

billion), reversing July's 21.4 percent surge.

Investors will get another look at the domestic housing

market on Tuesday when housing starts for September are

released.

Prices for Canadian government bonds were higher across the

maturity curve. The two-year bond rose 2-1/2 Canadian

cents to yield 1.177 percent, while the benchmark 10-year bond

gained 28 Canadian cents to yield 2.549 percent.

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