CANADA FX DEBT-C$ hits 7-1/2 month low vs euro, RBA comments weigh

* C$ at 0.9877 vs US$, or $1.0125
    * C$ lowest since May 1 against euro
    * IMF says C$ is 5 to 10 pct overvalued
    * Bond prices mixed

    By Solarina Ho and Claire Sibonney
    TORONTO, Dec 19 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Wednesday as comments earlier
this week from Australia's central bank about the commodities
sector peaking kept commodity-linked currencies under pressure.
    The Reserve Bank of Australia said it decided to cut
interest rates this month rather than wait because it saw
further evidence that the peak in the mining investment boom was
near, while the non-resource sector showed no signs of picking
    "Aussie and Kiwi are well off on that and I think the
Canadian dollar is weighing a little lower on that as well,"
said Mark Frey, chief market strategist at Cambridge Mercantile
Group, in Victoria, British Columbia.
    Frey also noted a widening spread between Brent and West
Texas Intermediate crude. "Not only is the overall trend
negative but the spread is becoming increasingly negative as
well. That, with sort of a global sentiment that the commodity
sector might be peaking, is definitely not good news for the
Canadian dollar."
    At 3:45 p.m. (2045 GMT), the Canadian dollar traded
at C$0.9877 versus the U.S. dollar, or $1.0125, weaker than
Tuesday's North American finish of C$0.9857, or $1.0145.
    Investors also looked to book profits ahead of the holidays
following a recent rally to two-month highs, while optimism over
a resolution to the U.S. budget crisis also waned as progress in
talks between the White House and congressional Republicans
seemed to slow.
    "I think this is probably some profit-taking heading into
the holidays, because the market was quite short USD/CAD.
Definitely some technical levels have broken on some of the
Canada crosses ... It's had a very decent rally," said David
Bradley, director of foreign exchange trading at Scotiabank.
    The currency did not react to a smattering of North American
data, including Canadian wholesale trade, which expanded by a
stronger-than-expected 0.9 percent in October, and data that
showed U.S. homebuilding permits touched their highest level in
nearly 4-1/2 years in November.  
    Bradley said the currency's strength has stalled around the
C$0.9825 level against the U.S. dollar, and noted a lot of
interest to sell toward C$0.9882.
    Canada was underperforming most major currencies except
other commodity-linked currencies and the Japanese yen. It
touched its weakest level against the euro since May 1 at
C$1.3131, or 76.16 euro cents.
    A key business survey in Germany suggested that Europe's
biggest economy was likely to bounce back quickly from its
slowdown. The growing confidence in the outlook lifted the euro
to a 16-month high against the yen and an 8-1/2 month peak
versus the U.S. dollar.  
    "It's kind of a confounding day ... we're seeing a very
different reaction from the pan-European currencies that are
holding up very well against the dollar today, primarily driven
by at least some movement on the fiscal cliff issue," Frey said.
    "You would think that would create sort of a risk-on
mentality, but we're really seeing a divergence today between
the direction in currency markets versus everything else with
the exception of that commodity-linkage for the dollar-bloc
    Citing a sharp widening of Canada's current account deficit
, the International Monetary Fund on Wednesday
said the Canadian dollar was about 5 to 15 percent overvalued,
due in part to heavy flows of foreign investment. Analysts have
noted that the IMF's plan to add the Canadian dollar to its list
of reserve currencies may have helped to boost its appeal.
    Canadian government bond prices were mixed. The two-year
bond was up 3 Canadian cents, yielding 1.137 percent,
while the benchmark 10-year bond lost 10 Canadian
cents to yield 1.851 percent.