CANADA FX DEBT-C$ softens as NAFTA negotiations weigh

 (Updates figures, adds strategist commentary, details on
business outlook survey)
    * Canadian dollar at C$1.2519 or 79.88 U.S. cents
    * Bond prices higher across the maturity curve

    By Solarina Ho
    TORONTO, Oct 16 (Reuters) - The Canadian dollar retreated
against its U.S. counterpart on Monday, as tensions rise over
negotiations to modernize NAFTA,  with talks set to be extended.
    Canada and Mexico are grappling with tough demands by the
United States to bring major changes to the North American Free
Trade Agreement that are increasing the odds the pact will not
    Canada sends about 75 percent of its exports to the United
States, and its economy could suffer if the agreement is not
    "Negative NAFTA sentiment seemed to push USD/MXN as well as
USD/CAD higher today in the early morning hours and we held onto
those levels for the most part in both pairs," said Greg
Anderson, global head of foreign exchange strategy for BMO
Capital Markets in New York.
    At 4 p.m. ET (2000 GMT), the Canadian dollar          was
trading at C$1.2521 to the greenback, or 79.87 U.S. cents, down
0.4 percent.
    The currency traded between C$1.2471 and C$1.2558. The
weakness came even as the price of crude, a major Canadian
export, edged higher amid fighting in Iraq's Kirkuk oil region.
    A Bank of Canada business survey released on Monday showed
Canadian companies have seen capacity and labor market pressures
intensify over the past year but has not yet hit their ability
to meet demand. The survey results underscored expectations the
bank will not raise interest rates next week.            
    Over the weekend, Bank of Canada Governor Stephen Poloz said
growth will slow as the economy approaches full capacity. While
the economy overall has bounced back, there were still pockets
of weakness, he added. Canada's economic performance in the
first half of the year has put it at the top of the Group of
Seven developed nations.
    Speculators have raised bullish bets on the loonie to the
highest since November 2012, data from the U.S. Commodity
Futures Trading Commission and Reuters calculations showed on
    As of Oct. 10, Canadian dollar net long positions had edged
up to 76,392 contracts from 75,128 a week earlier.
    Canadian government bond prices were higher across the
maturity curve, with the two-year            price up 3 Canadian
cents to yield 1.526 percent and the benchmark 10-year
            rising 8 Canadian cents to yield 2.03 percent.
    Canada's 2-year yield fell below its U.S. equivalent for the
first time since Sept 1. The spread shifted 6 basis points to 

 (Reporting by Solarina Ho; Editing by Jonathan Oatis)