CANADA FX DEBT-C$ retreats as rate-cut possibility gathers steam

(Updates to close; adds quote, Bank of Canada poll, rate cut
    * Canadian dollar at C$1.2740 or 78.49 U.S. cents
    * Bond prices higher across the maturity curve

    By Solarina Ho
    TORONTO, July 8 (Reuters) - The Canadian dollar ended weaker
against its U.S. counterpart on Wednesday on expectations of an
interest rate cut in Canada next week and as investors worldwide
grew more averse to risk.
    A string of disappointing economic data that suggests Canada
could be in a recession has prompted a growing number of
forecasts that the Bank of Canada would cut interest rates next
week, according to a Reuters poll. 
    Less than two weeks ago, economists had been expecting the
central bank to remain on hold after surprising markets in
January with a 25 basis point rate cut aimed to help ease the
impact of plunging crude prices.
    Recent data, however, including an unexpected contraction in
Canadian growth in April, and a bigger-than-expected trade
deficit in May has pushed markets to price in a roughly 50
percent chance of a rate cut at the bank's upcoming policy
decision, scheduled for next week. 
    The Canadian dollar finished at C$1.2740 to the
greenback, or 78.49 U.S. cents, weaker than the Bank of Canada's
official close of C$1.2712, or 78.67 U.S. cents, on Tuesday.
    "The market has a very negative view on the Canadian
economy, so it's hard to see the Canadian dollar make much
headway," said Don Mikolich, executive director, foreign
exchange sales at CIBC World Markets, adding that Friday's jobs
report will be of key interest.
    "Employment has been on the better side overall, but those
job gains don't seem to be translating through to the real
economy. ... A really good (jobs) number is the only thing that
might be a stay of execution for next week."
    Mikolich said there appeared to be room for further weakness
in the Canadian dollar, with markets eyeing the C$1.28 to C$1.30
    The price of crude, a key Canadian export, fell more than 1
percent on a surprise build in stockpiles and added to the
currency's woes. 
    Investors also fled to safe-haven assets as the rout on
China's stock markets resumed, raising concerns that China's
economy could destabilize. Jitters over the unresolved Greek
debt crisis also loomed. 
    Canadian government bond prices rose across the maturity
curve, with the two-year price up 6 Canadian cents to
yield 0.435 percent and the benchmark 10-year rising
56 Canadian cents to yield 1.516 percent.
    The Canada-U.S. two-year bond spread was -11.4 basis points,
while the 10-year spread was -68.2 basis points.

 (Additional reporting by Leah Schnurr in Ottawa; Editing by
Peter Galloway)