CANADA FX DEBT-C$ drops to March levels as trade deficit spurs rate-cut bets

* Canadian dollar ends at C$1.2712 or 78.67 U.S. cents
    * Bond prices higher across the maturity curve

    By Solarina Ho
    TORONTO, July 7 (Reuters) - The Canadian dollar tumbled to
its weakest close against the greenback since March on Tuesday
after data showed Canada posted a bigger-than-expected trade
deficit in May, setting the stage for a possible Bank of Canada
interest rate cut next week.
    The C$3.34 billion trade deficit was the second biggest on
record and the eighth monthly deficit in a row as exports
declined 0.6 percent and imports rose 0.2 percent.
    The trade numbers were the latest in a string of
disappointing data that could force the central bank to make a
move to try to stimulate the economy. TD Bank and CIBC are among
those already predicting a rate cut.
    "Today's price action just extends what we've been seeing
over the past couple of days in USD/CAD, which is a move to
price in further potential for a rate cut," said Greg Moore,
senior currency strategist at RBC Capital Markets.
    The Canadian dollar closed at C$1.2712 to the
greenback, or 78.67 U.S. cents, weaker than the Bank of Canada's
official finish of C$1.2652, or 79.04 U.S. cents, on Monday.
This was well off the C$1.2780 hit earlier in the session, but
was still the currency's weakest close since March.
    Before the trade data on Tuesday, the loonie was already
weaker due to Monday's plunge in the price of crude, a major
Canadian export, and on safe-haven buying of the U.S. dollar
amid ongoing euro zone jitters.
    "The U.S. dollar is pretty strong today in general, so
there's a flight to dollar safety," said Avery Shenfeld, chief
economist at CIBC World Markets. "It's not surprising to see the
Canadian dollar weaker on a number of fronts, both domestic and
    A partial recovery in crude prices on Tuesday helped pull
the currency back from its weakest levels, though U.S. oil still
closed lower following a fairly volatile session. Oil prices are
expected to remain vulnerable due to concern about China's stock
market losses and Greece leaving the euro zone. 
    "I do think this is the beginning of a pretty active couple
of weeks. We haven't seen the end of the volatility in CAD,"
Moore said. 
    Canadian government bond prices were higher across the
maturity curve, with the two-year price up 3 Canadian
cents to yield 0.465 percent and the benchmark 10-year
 rising C$1.13 to yield 1.578 percent.
    The Canada-U.S. two-year bond spread was -12.4 basis points,
while the 10-year spread was -68.0 basis points.

 (Reporting by Solarina Ho; Editing by Peter Galloway)