CANADA FX DEBT-C$ strongest since September as rate hikes eyed

 (Adds strategist comment, updates prices)
    * Canadian dollar at C$1.2930, or 77.34 U.S. cents
    * Bond prices lower across a steeper yield curve
    * Two-year yield touches its highest since October 2014

    By Alastair Sharp
    TORONTO, July 4 (Reuters) - The Canadian dollar hit its
strongest level since September against its U.S. counterpart on
Tuesday as Bank of Canada Governor Stephen Poloz added more
support to the view the central bank will raise interest rates
as early as next week.
    Inflation in Canada should be well into an uptrend by the
first half of 2018, Poloz told German newspaper Handelsblatt,
adding that policy normalization must begin before price growth
hits its target.             
    "That was another chance that the bank didn't take to push
back against the idea that they might be raising rates next
week," said Bipan Rai, director of foreign exchange strategy at
CIBC Capital Markets, who expects two hikes this year.
    Top Bank of Canada officials' recent assertions that a pair
of 2015 interest rate cuts did their job in cushioning the
economy from collapsing oil prices appear to be paving the way
for a tightening move as soon as July 12.              
    The discount at which Canadian two-year bonds trade versus
U.S. Treasuries have also narrowed sharply since late June.
    The two-year            price fell 6.5 Canadian cents to
yield 1.137 percent and the 10-year             declined 60
Canadian cents to yield 1.832 percent on Tuesday.
    The two-year yield is at its highest since October 2014.
    Chances of a rate hike next week are nearly 65 percent, data
from the overnight index swaps market shows.           
    At 4 p.m. ET (2000 GMT), the Canadian dollar          was
trading at C$1.2930 to the greenback, or 77.34 U.S. cents, up
0.6 percent.
    At one point the loonie touched C$1.2912, its strongest
since Sept. 9.
    CIBC's Rai said the currency could strengthen further in the
near term, but would struggle to push beyond C$1.2830 unless the
central bank convinces investors that a third hike is on the
    On Friday, the loonie was helped by data showing Canada's
economy grew for a sixth consecutive month in April, while a
central bank survey of business sentiment showed firms were
feeling more upbeat.             
    Speculators have cut bearish bets on the Canadian dollar for
a fifth straight week, data from the U.S. Commodity Futures
Trading Commission and Reuters calculations showed on Friday.
Canadian dollar net short positions tumbled to 49,495 contracts
as of June 27 from 82,881 a week earlier.                 
    Canada's trade data for May is due on Thursday and the June
employment report is due on Friday.         

 (Additional reporting by Fergal Smith; Editing by Chris Reese
and Diane Craft)