CANADA FX DEBT-C$ rallies after Bank of Canada holds rate, says stimulus working

(Updates throughout with Bank of Canada decision, strategist
comment, market reaction)
    * Canadian dollar at C$1.3185 or 75.84 U.S. cents
    * Bond prices mixed across the maturity curve

    By Solarina Ho
    TORONTO, Sept 9 (Reuters) - The Canadian dollar rallied
against its U.S. counterpart on Wednesday, touching its
strongest level of the session after the Bank of Canada kept its
key interest rate unchanged.
    The central bank, which had already cut interest rates twice
this year by 25 basis points each time, held its target for the
overnight rate steady at 0.5 percent, stating that the previous
cuts were still stimulating the economy. 
    Recent data has shown some improvements in the Canadian
economy, helped by solid household spending and a firm U.S.
recovery, as well as a weak Canadian dollar.
    The Bank of Canada expressed some caution, however, over the
impact of extremely volatile crude oil prices and global markets
jittery about China's growth prospects.
    "It seems they're quite comfortable with a balanced
assessment of risk, so I think this leaves the Bank of Canada on
the sidelines for quite some time," said David Tulk, chief
Canada macro strategist at TD Securities.
    At 10:53 a.m. EDT (1453 GMT), the Canadian dollar 
was trading at C$1.3185 to the greenback, or 75.84 U.S. cents,
stronger than just prior to the decision and the Bank of
Canada's official close of C$1.3205, or 75.73 U.S. cents on
    The loonie, which was stronger against most of its key
currency counterparts following the rate decision, had briefly
weakened to C$1.3275 after the decision was announced before
quickly rallying to C$1.3155.
    Markets had been pricing in a more than 30 percent chance of
a 25 basis point interest rate cut in October ahead of
Wednesday's decision. That has since been pared back to 18.8
    Canadian government bond prices were mixed across the
maturity curve, with the longer-term prices lower. The two-year
 price fell 6.5 Canadian cents to yield 0.467 percent
and the benchmark 10-year slid 42 Canadian cents to
yield 1.515 percent.
    The Canada-U.S. two-year bond spread narrowed to -29.0 basis
points, while the 10-year spread widened to -72.9 basis points.

 (Reporting by Solarina Ho; Editing by Lisa Von Ahn and W Simon)