CANADA FX DEBT-C$ strengthens as oil prices rise, exports climb

    * Canadian dollar at C$1.2935, or 77.31 U.S. cents
    * Bond prices lower across a steeper yield curve
    * Two-year yield touches highest since September 2014

    By Fergal Smith
    TORONTO, July 6 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Thursday as oil prices rose,
while domestic data showed a solid gain for the country's
    Canada's trade deficit almost doubled to C$1.09 billion in
May but in a sign of economic strength, both exports and imports
reached record highs, Statistics Canada data indicated.
    "The Bank of Canada will probably take some comfort from
indications that export growth is holding up," said Paul Ferley,
assistant chief economist at Royal Bank of Canada.
    Expectations for an interest rate increase as soon as next
week have been rising since Bank of Canada officials said in
June that a pair of rate cuts in 2015 had done their job to
cushion the economy from collapsing oil prices.                 
    Prices of oil, one of Canada's major exports, recovered some
ground after a surprisingly upbeat picture of U.S. demand halted
the previous day's steep slide, although the prospect of
oversupply in 2018 prompted more analysts to cut their price
    At 9:24 a.m. ET (1324 GMT), the Canadian dollar          was
trading at C$1.2935 to the greenback, or 77.31 U.S. cents, up
0.2 percent.
    The currency traded in a range of C$1.2924 to C$1.2984. It
touched on Tuesday its strongest since September at C$1.2912.
    Still, foreign exchange strategists expect the loonie to
weaken over the coming months as the recent rally driven by
expectations for higher interest rates runs out of steam and
lower oil prices weigh.             
    Separate domestic data showed that the value of Canadian
building permits issued in May jumped 8.9 percent on plans for
more residential building construction, particularly in the
red-hot Ontario market.             
    Canadian government bond prices fell across a steeper yield
curve in sympathy with U.S. Treasuries and German Bunds as
minutes from the European Central Bank's June meeting showed the
central bank opened the door to dropping a pledge to boost its
bond-purchase programme if necessary.             
    The two-year            fell 4 Canadian cents to yield 1.153
percent and the 10-year             declined 46 Canadian cents
to yield 1.845 percent.
    The two-year yield touched its highest since September 2014
at 1.159 percent.
    Canada's employment report for June is due on Friday.

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli)