CANADA FX DEBT-C$ tugged lower by Canada GDP, Spain

* C$ falls to C$0.9879 vs US$, or $1.0122
    * Canadian economy unexpectedly shrinks in Feb
    * Bond prices move higher across curve

    By Jennifer Kwan	
    TORONTO, April 30 (Reuters) - Canada's dollar sagged against
its U.S. counterpart and domestic bond yields retreated on
Monday after Canadian GDP unexpectedly shrank in February and
Spain stoked euro zone worries.	
    Canada's gross domestic product contracted by 0.2 percent in
February from January, data showed, surprising analysts who had
expected a 0.2 percent increase.	
    The report disappointed markets and cooled talk that the
Bank of Canada could start raising interest rates in the near
    The Canadian currency also tracked a fall in global stock
markets on data showing Spain slipped into recession and the
U.S. economy appeared to be slowing.  	
    "Blood and guts all over the street today," said Steve
Butler, managing director of foreign exchange trading at
Scotiabank, of the move in the Canadian currency.	
    "I think the market was expecting maybe a little bit of a
disappointment on the GDP and we got a lot of disappointment in
the GDP number," he said. 	
    He added he was a little surprised about the market's strong
reaction, but said month end flows could be exaggerating the
    At around 12:55 a.m. (1655 GMT), the Canadian dollar
 was at C$0.9879 versus the U.S. dollar, or $1.0122,
down from Friday's finish at C$0.9810 versus the U.S. dollar, or
$1.0194, following the Canadian dollar's advanced to a
seven-month high.	
    Canada's currency has been supported in the last couple
weeks by ramped-up expectations of interest rate hikes by the
Bank of Canada. It surprised investors with a more positive
domestic economic outlook and an explicit warning that it may
have to start raising rates again. 	
    The more-hawkish-than-expected central bank had promoted a
significant widening in two-year bond spreads between Canada and
the United States.	
    Following the data on Monday however, bond prices jumped and
yields dropped, while the pricing of overnight index swaps also
showed traders had cut back prospects of rate increases for the
remainder of the year. 	
    "The market, in my mind, got carried away from comments by
(Bank of Canada Governor) Carney," said Butler, "all of a sudden
pricing in rate cuts this year, more than one potentially, was
much, much too aggressive. I think the market is feeling a
little bit of that today." 	
    Jeremy Stretch, head of foreign exchange strategy at CIBC
World Markets in London, said the Canadian dollar could soften
further to around C$0.9870-80 in the short term, noting weakness
against the euro as well, though risk factors in the euro zone
would far outweigh any concerns about a monthly GDP number in
    Canadian government bonds outperformed their U.S.
counterparts across the curve following the negative surprise in
Canada's February GDP. 	
    The rate-sensitive two-year bond rose 16 Canadian
cents to yield 1.348 percent, while the benchmark 10-year bond
 added 26 Canadian cents to yield 2.057 percent.