CANADA FX DEBT-C$ rallies as strong domestic growth boosts rate hike bets

    * Canadian dollar at C$1.2557, or 79.64 U.S. cents
    * Loonie hit weakest intraday since Aug. 18 at C$1.2663
    * Bond prices lower across a flatter yield curve
    * Canada-U.S. 2-year spread hits narrowest in one month

    By Fergal Smith
    TORONTO, Aug 31 (Reuters) - The Canadian dollar rallied on
Thursday against the U.S. dollar, recovering from a nearly
2-week low, after data showing Canada's economy expanded at the
fastest pace in nearly 6 years boosted chances of another
interest rate hike from the Bank of Canada.
    Gross domestic product grew at an annualized 4.5 percent
pace, handily topping forecasts for 3.7 percent, as consumers
continued to spend and energy exports rose, data from Statistics
Canada showed. Separate data showed GDP grew 0.3 percent in
    "If one more (interest rate) hike from the Bank of the
Canada wasn't a done deal, this makes it a much easier case,"
said Andrew Kelvin, senior rates strategist at TD Securities.   
    Chances of a rate hike as soon as next week climbed to
one-in-three from around 20 percent before the data, while
investors see a greater-than 80 percent chance of a hike by
October, data from the overnight index swaps market shows.
    The central bank's policy rate sits at 0.75 percent, after
it was raised in July for the first time in nearly seven years.
    Adding to support for the loonie, U.S. crude oil prices
rebounded after being pressured this week by storm Harvey, which
knocked out almost a quarter of U.S. refineries.             
    U.S. crude        prices were up 1.26 percent at $46.54 a
    At 9:22 a.m. ET (1322 GMT), the Canadian dollar          was
trading at C$1.2557 to the greenback, or 79.64 U.S. cents, up
0.5 percent.
    The currency's strongest level of the session was C$1.2554,
while it touched its weakest since Aug. 18 at C$1.2663.
    The U.S. dollar        rose against a basket of currencies,
although some gains were pared after data showed U.S. consumer
spending rose slightly less than expected in July and annual
inflation increased at its slowest pace since late 2015.
    Canadian government bond prices were lower across a flatter
yield curve, with the two-year            price down 8 Canadian
cents to yield 1.28 percent and the 10-year             falling
30 Canadian cents to yield 1.871 percent.
    The gap between the Canadian 2-year yield and its U.S.
equivalent narrowed by 4.8 basis points to a spread of -4.9
basis points, its narrowest since July 31.

 (Reporting by Fergal Smith; Editing by Bernadette Baum)