CANADA FX DEBT-C$ rallies on reduced rate cut bets, higher oil prices

(Adds detail on rate outlook, auction, quotes; updates prices)
    * Canadian dollar at C$1.4279, or 70.03 U.S. cents
    * Bond prices lower across the maturity curve

    By Fergal Smith
    TORONTO, Jan 21 (Reuters) - The Canadian dollar rallied
against its U.S. counterpart on Thursday as Bank of Canada rate
cut bets were pared, while a rally in crude oil prices and
stocks added to support for the currency.
    The market reappraised the Bank of Canada policy outlook
after it decided on Wednesday not to cut interest rates, putting
the onus on federal authorities to raise spending. 
    "The reference to fiscal policy puts the Bank of Canada on
hold for at least the next several months," said Bipan Rai,
director of foreign exchange strategy at CIBC Capital Markets.
    The implied probability of a March rate cut dwindled to less
than 16 percent from 26 percent at Wednesday's close, while the
market no longer fully discounted a rate cut by the end of 2016.
    European Central Bank President Mario Draghi provided a
strong signal that more easing could be coming within months
, lending support to risk-sensitive assets including
commodity currencies.
    Oil prices  rebounded from 12-year lows as
rallying financial markets gave some bearish traders reason to
take profits on record short positions.  
    The Canadian dollar ended at C$1.4279 to the
greenback, or 70.03 U.S. cents, much stronger than Wednesday's
close of C$1.4490, or 69.01 U.S. cents.
    The currency's strongest level of the session was C$1.4228,
while its weakest was C$1.4540.
    The 70 U.S. cents rate is the key level to watch, according
to Rai. The currency had fallen below that psychological
threshold last week for the first time since May 2003.    
    Canadian government bond prices were lower across the
maturity curve, with the two-year price down 13.5
Canadian cents to yield 0.455 percent and the benchmark 10-year
 falling 95 Canadian cents to yield 1.264 percent.
    The Canada-U.S. two-year bond spread was 4.8 basis points
less negative at -38.5 basis points, while the 10-year spread
was 5.1 basis points less negative at -77.2 basis points as
Canadian government bonds underperformed.
    The Bank of Canada conducted a 10-year auction on behalf of
the Government of Canada, with C$2.5 billion issued of a bond
maturing in June 2026, carrying a 1.5 percent coupon, at an
average yield of 1.380 percent. 
    December inflation and November retail sales data are
awaited on Friday. 

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli and
James Dalgleish)