CANADA FX DEBT-Loonie weaker on U.S. shutdown, Yellen nomination

Reuters

* C$ at C$1.0374 vs US$, or 96.39 U.S. cents

* Janet Yellen to be nominated to head Federal Reserve

* Shutdown, looming debt ceiling deadline has markets wary

* Bond prices mixed

By Leah Schnurr

TORONTO, Oct 9 (Reuters) - The Canadian dollar weakened on

Wednesday as the U.S. government shutdown stretched on and as

news that Janet Yellen will be nominated to run the Federal

Reserve pushed the greenback higher.

President Barack Obama will nominate Fed number two Yellen

on Wednesday to head the central bank. Investors were relieved

to get clarity on at least one unknown in the markets and

analysts say she will move cautiously in reining in the economic

stimulus the Fed has put in place.

At the same time, the partial federal government shutdown in

the United States dragged on. Obama said he would negotiate on

budget issues only if Republicans agree to re-open the federal

government and raise the debt limit with no conditions.

A budget impasse closed non-essential U.S. government

services early last week and the showdown is bringing lawmakers

closer to a separate and more crucial deadline to raise the debt

ceiling to avoid a potential default.

Investors are concerned the government shutdown will start

to bite into economic growth, which could hurt Canada, the

largest trading partner with the United States. The possibility

of a default has also sparked fears of the havoc it would wreak

on the global economy and markets.

Wednesday's strength in the U.S. dollar is unlikely to last

as the focal point turns back to the country's fiscal problems,

said Benjamin Reitzes, senior economist and foreign exchange

strategist at BMO Capital Markets in Toronto.

"A weaker U.S. economy is clearly bad for Canada, so if the

U.S. dollar does weaken, Canada may not benefit that much," said

Reitzes.

The Canadian dollar was at C$1.0374, or 96.39 U.S.

cents, weaker than Tuesday's close of C$1.0368, or 96.45 U.S.

cents. The U.S. dollar was up 0.5 percent against a basket of

currencies.

The United States has until mid-October before it hits the

$16.7 trillion borrowing limit. The impasse was reminiscent of

the 2011 showdown over the debt ceiling, which yielded an

agreement only at the last minute.

"Accidents do happen when you're playing with fire. They

avoided it last time, who knows if they'll avoid it this time,"

said Reitzes.

"I'd expect something short-term - a few weeks or months -

to give the government more time to negotiate amongst

themselves."

Following a brief spike after the Federal Reserve's surprise

decision to stand pat on its economic stimulus on Sept. 18, the

Canadian dollar has been trading in a tight range for several

sessions.

The minutes of that Fed meeting will be released later on

Wednesday and investors will be looking for clues as to how

close the bank came to scaling back its stimulus.

Analysts see the loonie in a range between mid-C$1.02 and

mid-C$1.03 for now, baring a resolution or other catalyst.

Prices for Canadian government bonds were mixed across the

maturity curve. The two-year bond slipped 1 Canadian

cent to yield 1.195 percent, while the benchmark 10-year bond

fell 20 Canadian cents to yield 2.564 percent.

View Comments (0)