CANADA FX DEBT-C$ rallies as rising inflation boosts rate hike chances

    * Canadian dollar at C$1.2846, or 77.85 U.S. cents
    * Loonie touches its strongest since March 12 at C$1.2825
    * Bond prices lower across the yield curve
    * Canada-U.S. 2-year spread narrowed by 5.3 basis points

    By Fergal Smith
    TORONTO, March 23 (Reuters) - The Canadian dollar
strengthened to an 11-day high against the greenback on Friday
as oil prices rose and hotter-than-expected domestic inflation
data raised the chances of a further Bank of Canada interest
rate hike over the coming months.
    The annual inflation rate rose to 2.2 percent, a three-year
high, from 1.7 percent in January, Statistics Canada said.
Economists had forecast a rate of 2.0 percent.             
    The Bank of Canada's three measures of core inflation also
all strengthened.
    "I think it will reinforce the view that the bank will keep
slowly grinding rates higher," said Doug Porter, chief economist
at BMO Capital Markets.
    The central bank has hiked rates three times since July even
as it worried about a more uncertain outlook for trade. Chances
of a hike in May rose to 82 percent from 74 percent before the
data, the overnight index swaps market indicated.           
    Still, separate data showing a weaker-than-expected 0.3
percent rise in January retail sales added to the picture of a
domestic economy that has lost some momentum in recent months.  
    The price of oil, one of Canada's major exports, rose after
the Saudi energy minister said the Organization of the Petroleum
Exporting Countries would need to keep coordinating supply cuts
with non-member countries including Russia into 2019.
    U.S. crude        prices were up 1.1 percent at $65.02 a
    At 9:49 a.m. EST (1349 GMT), the Canadian dollar         
was trading 0.7 percent higher at C$1.2846 to the greenback, or
77.85 U.S. cents.
    The currency touched its strongest since March 12 at
    The U.S. dollar        fell against a basket of major
currencies as investors weighed escalating global trade
    Canada's commodity-linked economy could be hurt if global
trade slowed. But the loonie has benefited this week from
optimism about a deal to revamp the North American Free Trade
    Canadian government bond prices were lower across the yield
curve, with the two-year            price down 8 Canadian cents
to yield 1.868 percent and the 10-year             falling 18
Canadian cents to yield 2.202 percent.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 5.3 basis points to -41.1 basis points.

 (Additional reporting by Susan Taylor
Editing by Nick Zieminski)