CANADA FX DEBT-C$ strengthens as oil rallies; investors look to Fed

* Canadian dollar at C$1.2640, or 79.11 U.S. cents
    * Bond prices mixed across steeper maturity curve

 (Adds Poloz comments, quotes, updates prices)
    By Fergal Smith and Leah Schnurr
    TORONTO/OTTAWA, April 26 (Reuters) - The Canadian dollar
strengthened modestly against the greenback on Tuesday as oil
prices rose, but the loonie stuck to a tight range as investors
looked ahead to a rate decision from the Federal Reserve.
    Weaker-than-expected U.S. data also weighed on the U.S.
currency, to the benefit of the Canadian dollar. Investors were
betting that the Fed will strike a dovish tone in its policy
statement to be released on Wednesday, but the uncertainty
around the announcement kept moves in the Canadian dollar muted.
    "It's tough to figure out what exactly their reaction
function is right now. They were more dovish than we thought at
the prior meeting," said Benjamin Reitzes, senior economist at
BMO Capital Markets.
    The Canadian dollar saw little reaction to comments from
Bank of Canada Governor Stephen Poloz that it would take another
significant economic shock for the central bank to consider
cutting rates again. 
    Reitzes said that had been built in to market expectations
after the bank earlier this month upgraded its economic
forecasts and brought forward when it expects the output gap to
    "That really wouldn't be consistent with a continued easing
bias," said Reitzes.
    The implied probability of a Bank of Canada rate hike this
year has increased to 24 percent from near zero before
stronger-than-expected retail sales data on Friday, overnight
index swaps (OIS) showed. At the start of March, the OIS market
had implied a more than 50 percent chance of a cut. 
    In midday trading, the Canadian dollar was at
C$1.2628 to the greenback, or 79.19 U.S. cents, stronger than
Monday's close of C$1.2686, or 78.83 U.S. cents.
    The loonie has rallied 16 percent since falling to a 12-year
low in January. 
    Oil prices rose, boosted by a weaker dollar and by
expectations that demand could grow quickly enough to match
supply this year. U.S. crude prices were up $1.33 at
$43.97 a barrel. 
    Canadian government bond prices were lower across the
maturity curve, with the two-year price down half a
Canadian cent to yield 0.702 percent and the new benchmark
10-year falling 26 Canadian cents to yield 1.573

 (Editing by Chris Reese)