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 higher across curve

By Leah Schnurr

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

Monday as a U.S. federal government shutdown 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.

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.

"It's at the point now where they're obviously negotiating

the whole fiscal picture - the debt ceiling, plus the spending,"

said Don Mikolich, executive director of foreign exchange sales

at CIBC World Markets in Toronto.

"It's leading some to wonder whether tapering is due to be

pushed out much further to the end of the year or potentially

into the new year."

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 major

driver of the loonie.

The Canadian dollar ended the session at C$1.0313,

or 96.96 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.

"There's not a lot of flows in the market given that we're

so range-bound," said Mikolich.

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 half a

Canadian cent to yield 1.187 percent, while the benchmark

10-year bond gained 12 Canadian cents to yield 2.569

percent.

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