CANADA FX DEBT-C$ notches a 2-week high as inflation picks up

    * Canadian dollar at C$1.2586, or 79.45 U.S. cents
    * Loonie at session high touches its strongest since
    * Bond prices mixed across the yield curve
    * 10-year spread vs U.S. Treasuries narrows by 1.2 basis

    TORONTO, Aug 18 (Reuters) - The Canadian dollar rose to a
two-week high against its U.S. counterpart on Friday, as data
showing an uptick in the Bank of Canada's core measures of
inflation supported the view that the central bank will raise
interest rates in the fall.
    Canada's overall annual inflation rate rose to 1.2 percent
from June's 20-month low of 1.0 percent, matching analysts'
    Two of the three measures of core inflation that the Bank of
Canada introduced last year saw gains, Statistics Canada said.  
    "They (the core measures) are trending higher, and this is
consistent with the output gap being almost closed," said Jimmy
Jean, senior economist at Desjardins Capital Markets.
    The output gap is the difference between what an economy
produces and its potential production, without overheating.
    Desjardins sees the Canadian central bank on track to hike
rates again in the fall.
    Strengthening in the domestic economy prompted the central
bank to raise interest rates in July for the first time in
nearly seven years. 
    The market sees a two-in-three chance of another hike in
October, overnight index swaps figures show, little changed from
before the inflation data.           
    The bank's benchmark policy rate currently sits at 0.75
    At 9:28 a.m. ET (1328 GMT), the Canadian dollar          was
trading at C$1.2586 to the greenback, or 79.45 U.S. cents, up
0.8 percent.
    The currency's weakest level of the session was C$1.2691,
while it touched its strongest since Aug. 4 at C$1.2575.
    Gains for the loonie came even as prices of oil, one of
Canada's major exports, edged lower. U.S. crude        prices
were down 0.19 percent at $47.00 a barrel.            
    The U.S. dollar        dipped against a basket of major
currencies, pressured by continuing uncertainty over the White
House's ability to push through its economic agenda.
    Canadian government bond prices were mixed across the yield
curve, with the two-year            price flat to yield 1.231
percent and the 10-year             rising 8 Canadian cents to
yield 1.838 percent.
    Still, the difference between the 10-year yield and its U.S.
equivalent narrowed by 1.2 basis points to a spread of -33.7
basis points, as Canadian government bonds underperformed.

 (Reporting by Fergal Smith; Editing by W Simon)