CANADA FX DEBT-C$ snaps back to near two-year high after GDP surprise

 (Adds trader comment, speculative data, updates prices)
    * Canadian dollar at C$1.2443, or 80.37 U.S. cents
    * Canada's economy grows 0.6 percent in May
    * Bond prices lower across the yield curve
    * Two-year yield touches its highest intraday since April

    By Alastair Sharp
    TORONTO, July 28 (Reuters) - The Canadian dollar resumed its
rally to two-year highs against the U.S. currency on Friday, as
surprisingly robust domestic economic data boosted expectations
the Bank of Canada will again raise interest rates.
    The yield on two-year Canadian bonds touched its highest in
more than five years and is fast approaching the equivalent U.S.
Treasuries as investors adjust to a more hawkish Canadian
central bank coupled with U.S. political uncertainty and a
toning down of expectations for U.S. hikes.
    Canada's gross domestic product expanded 0.6 percent in May
on growth in the energy, manufacturing and retail trade sectors,
Statistics Canada said, exceeding economists' forecasts for a
0.2 percent rise.             
    "The GDP data today shocked everyone," said David Bradley,
director of foreign exchange trading at Scotiabank. "It's just
another piece of the puzzle that is adding to the Canadian
dollar strength we've seen recently."
    The currency has gained almost 10 percent since May, and
added 0.7 percent on the week, despite a retreat on Thursday
after upbeat U.S. durable goods and trade data.             
    At 4 p.m. ET (2000 GMT), the Canadian dollar          was
trading at C$1.2443 to the greenback, or 80.37 U.S. cents, up
0.9 percent.
    It traded between C$1.2420 and C$1.2567 during the session,
after touching its strongest in more than two years at C$1.2414
during Thursday's session.
    Speculators increased bullish bets on the loonie, data from
the U.S. Commodity Futures Trading Commission and Reuters
calculations showed. Canadian dollar net long positions rose to
26,613 contracts as of July 25 from 8,043 contracts a week
    The Bank of Canada raised rates earlier this for the first
time in nearly seven years. Chances of another rate hike as soon
as September have doubled since last week to 40 percent, while
there is nearly a four-in-five chance of a hike by October, data
from the overnight index swaps market showed.           
    Adding to support for the loonie, prices of oil, one of
Canada's major exports, reached fresh two-month highs as
investors digested signs of an easing oversupply picture.
    Canadian government bond prices fell across the yield 
curve, with the two-year            down 5.5 Canadian cents to
yield 1.327 percent and the 10-year             falling 25
Canadian cents to yield 2.025 percent.
    The two-year yield touched its highest intraday since April
2012 at 1.358 percent, while the gap between it and its U.S.
counterpart narrowed by 3.8 basis points to a spread of -2.4

 (Additional reporting by Fergal Smith; Editing by W Simon and
Richard Chang)