CANADA FX DEBT-C$ notches 1-month high as Bank of Canada turns more upbeat

 (Adds strategist quote and details on BAX futures, speculators
and spreads versus Treasuries and updates prices)
    * Canadian dollar at C$1.3419, or 74.52 U.S. cents
    * Loonie touches its strongest since April 24 at C$1.3418
    * Bond prices mixed across a flatter yield curve
    * 2-year spread vs Treasuries hits narrowest in 3 weeks

    By Fergal Smith
    TORONTO, May 24 (Reuters) - Canada's dollar strengthened to
a one-month high against its U.S. counterpart on Wednesday after
the Bank of Canada was more upbeat about the economy than some
investors had expected.
    The Bank of Canada held interest rates steady at 0.50
percent, as expected. It reiterated its position that excess
capacity remains in the economy but dropped a reference to slack
being "material" and noted strong spending by Canadians along
with a housing boom and job growth.             
    "It's probably a bit more positive than many would have
expected," said Doug Porter, chief economist at BMO Capital
    "We're slowly but surely moving towards the day when the
Bank (of Canada) might actually consider raising interest
    Three-month Canadian bankers' acceptance futures which
expire in March 2018 fell 3 basis points, according to Reuters
data, reflecting increased chances of an interest rate hike next
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading at C$1.3419 to the greenback, or 74.52 U.S. cents, up
0.7 percent.
    The currency's weakest level was C$1.3540, while it touched
its strongest since April 24 at C$1.3418.
    The loonie has recovered from a 14-month low of C$1.3793 set
earlier this month, helped by a rally in the price of oil, one
of Canada's major exports.
    "The market has been running quite short CAD (Canadian
dollars) ... the oil price recovery has put a lot of pressure on
those positions," said Daniel Katzive, head of FX strategy North
America at BNP Paribas.
    Speculators have ramped up bearish bets on the Canadian
dollar to a record high, data from the Commodity Futures Trading
Commission and Reuters calculations showed on Friday.
    Oil prices retreated slightly as investors reacted to a
smaller-than-expected U.S. gasoline stock draw and awaited the
outcome of discussions in Vienna between OPEC and other
oil-exporting countries on whether to extend output cuts.
    U.S. crude        prices settled 11 cents lower at $51.36 a
    Canadian government bond prices were mixed across a flatter
yield curve as investors also weighed minutes from the latest
policy-setting meeting of the Federal Reserve.
    The two-year            dipped 2.5 Canadian cents to yield
0.716 percent and the 10-year             climbed 29 Canadian
cents to yield 1.482 percent.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 4.3 basis points to a spread of -57.3
basis points, its smallest gap since May 1, as shorter-dated
Canadian bonds underperformed.

 (Reporting by Fergal Smith; Editing by Tom Brown and Meredith