CANADA FX DEBT-C$ strengthens to a 1-week high as oil rallies

* Canadian dollar at C$1.2775, or 78.28 U.S. cents
    * Bond prices lower across the maturity curve

    TORONTO, May 12 (Reuters) - The Canadian dollar strengthened
to a one-week high against its U.S. counterpart on Thursday as
oil and stocks rose, while oil sands workers readied to return
after a wildfire.
    U.S. oil prices reached a six-month high, supported by data
from the International Energy Agency (IEA) showing tightening
supply. U.S. crude prices were up 1.15 percent to $46.74
a barrel 
    Wall Street opened higher, adding to support
for the risk-sensitive commodity-linked currency.
    Workers for one of the largest oil sands companies affected
by a wildfire in northern Canada will begin returning to the
shuttered facilities on Thursday, a union official said, the
latest indication the key petroleum production area was slowly
coming back online. 
    The loss of production has weighed on Canada's economic
outlook. Economists say second-quarter growth may slow to a
standstill, leaving the central bank on hold. 
    Overnight index swaps imply a 30-percent chance of a Bank of
Canada interest rate cut this year, dipping from nearly 40
percent at the start of the week as oil rallied and some oil
sands operations restarted. Still the market has swung from a 20
percent chance of a hike seen at the beginning of the month.
    At 9:26 a.m. EDT (1326 GMT), the Canadian dollar 
was trading at C$1.2775 to the greenback, or 78.28 U.S. cents,
stronger than Wednesday's close of C$1.2851, or 77.81 U.S.
    The currency's weakest level was C$1.2879, while it touched
its strongest since May 4 of C$1.2772.
    Canadian new home prices rose 0.2 percent in March, topping
analysts' expectations of 0.1 percent, data from Statistics
Canada showed. Prices have increased for the last 12 consecutive
    Canadian government bond prices were lower across the
maturity curve in sympathy with U.S. Treasuries. The two-year
 price fell 5.5 Canadian cents to yield 0.569 percent
and the benchmark 10-year declined 32 Canadian cents
to yield 1.338 percent.
    The 10-year yield touched on Wednesday its lowest since
April 18 of 1.274 percent.

 (Reporting by Fergal Smith; Editing by Nick Zieminski)