CANADA FX DEBT-C$ strengthens as factory sales climb, yield gap shrinks

    * Canadian dollar at C$1.2585, or 79.46 U.S. cents
    * Bond prices lower across the yield curve
    * Canada-U.S. 2-year spread hits narrowest since Aug. 18

    By Fergal Smith
    TORONTO, July 19 (Reuters) - The Canadian dollar edged
higher on Wednesday against the greenback as the U.S. yield
advantage shrunk and oil prices rose, while domestic data showed
a larger-than-expected increase in manufacturing sales.
    Canadian factory sales grew by 1.1 percent in May from
April, hitting a record level on higher sales of motor vehicles
and parts, data from Statistics Canada showed. Analysts had
forecast an increase of 0.8 percent.             
    The data shows that "the goods sector is delivering the
goods for the Canadian economy," Avery Shenfeld, chief economist
at CIBC Capital Markets, said in a research note.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 1.8 basis points to a spread of -14.1
basis points, its narrowest since Aug. 18.
    The narrower spread came after the Bank of Canada raised
interest rates last week for the first time since 2010 and
signaled it would hike again over the coming months.
    Prices of oil, one of Canada's major exports, were supported
by strong demand for gasoline, but rising output from OPEC
producers revived concerns about a persistent overhang of excess
    U.S. crude        prices were up 0.13 percent at $46.46 a
    At 9:26 a.m. ET (1326 GMT), the Canadian dollar          was
trading at C$1.2585 to the greenback, or 79.46 U.S. cents, up
0.3 percent.
    The currency traded in a range of C$1.2585 to C$1.2653. On
Tuesday, it had touched its strongest since early May 2016 at
    The loonie has gained roughly 7 percent since the Bank of
Canada turned hawkish in June.
    Canadian and Mexican officials will meet on Wednesday to
discuss how to handle negotiations on NAFTA, two sources said on
Tuesday, as a Canadian diplomat hinted at a potential clash with
    Canadian government bond prices were lower across the yield 
curve, with the two-year            down 3 Canadian cents to
yield 1.211 percent and the 10-year             falling 20
Canadian cents to yield 1.882 percent.
    Retail sales data for May and the June inflation report are
due out on Friday.         

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli)