CANADA FX DEBT-C$ weakens as yield advantage vs U.S. moderates

 (Adds trader comment, updates prices)
    * Canadian dollar at C$1.2180, or 82.10 U.S. cents
    * Canada-U.S. 5-year yield spread narrows 3.3 basis points
    * Bond prices mostly lower across the yield curve

    By Alastair Sharp
    TORONTO, Sept 12 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Tuesday, with Canada's yield
advantage moderating as investors pulled back from their most
aggressive bets on a hawkish Bank of Canada and cautious U.S.
Federal Reserve.
    The gap between Canada's 5-year yield and its U.S.
equivalent narrowed by 3.3 basis points to a spread of 1.6 basis
points. Last week, the spread pushed above parity for the first
time in nearly three years after the Bank of Canada raised
interest rates for the second time in three months.             
    "We're in the camp now that we might be a little too
aggressive on a December hike in Canada, and maybe too passive
on a U.S. move," said Darcy Browne, managing director for
foreign exchange sales at CIBC Capital Markets.
    The Bank of Canada struck back on Monday against criticism
it had not adequately prepared markets for last week's rate hike
after a prominent economist took issue with the central bank's
lack of communication in the nearly two months leading up to the
    At 4 p.m. ET (2000 GMT), the Canadian dollar          was
trading at C$1.2180 to the greenback, or 82.10 U.S. cents, down
0.6 percent.
    The move came despite higher oil prices and with the U.S.
dollar        clinging to the previous day's gains against a
basket of major currencies, supported by higher Treasury yields.
    The Canadian currency traded in a range of C$1.2083 to
    The loonie has rallied more than 13 percent since early May.
It touched its strongest in more than two years on Friday at
    Prices of oil, one of Canada's major exports, rose as
refinery restarts following Hurricane Harvey offset Hurricane
Irma's dampening effect on demand.             
    U.S. crude        prices were up 0.7 percent at $48.41 a
    Canadian government bond prices were mostly lower across the
yield curve, although the two-year            price rose half a
Canadian cent to yield 1.546 percent. The benchmark 10-year
            falling 13 Canadian cents to yield 2.043 percent.
    Canada's new housing price index for July is due on Thursday
and August home sales data is awaited on Friday.     

 (Additional reporting by Fergal Smith; Editing by Meredith
Mazzilli and Sandra Maler)