CANADA FX DEBT-C$ notches 2-month high as investors bet on trilateral trade deal

 (Adds quotes from market players)
    * Canadian dollar at C$1.2964, or 77.14 U.S. cents
    * Loonie touches its strongest since June 14
    * U.S. and Mexico agree on revamp of NAFTA trade pact
    * Bond prices fall across a steeper yield curve

    By Fergal Smith
    TORONTO, Aug 27 (Reuters) - The Canadian dollar strengthened
to a two-month high against its U.S. counterpart on Monday as
investors bet that an agreement between the United States and
Mexico to overhaul the NAFTA trade pact would lead to a
trilateral deal that includes Canada.
    U.S. President Donald Trump and outgoing Mexican President
Enrique Pena Nieto said talks with Canada would begin
immediately, though Trump threatened he could put tariffs on
Canadian-made cars if a three-way deal could not be reached.
    "CAD rallied based on the premise that Canada will come to
an agreement with the United States later this week," said Bipan
Rai, North America head of FX strategy at CIBC Capital Markets.
     Canada sends about 75 percent of its exports to the United
States so its economy could benefit if talks with the United
States and Mexico lead to a trilateral trade deal.
    "The trade relationship between Canada and the U.S. is so
intertwined that it's tough (for Trump) to be too punitive on
Canadian products," said Matt Skipp, president of SW8 Asset
    Shares of Canadian auto-parts producers were higher, with
Linamar Corp          up 6.3 percent, Martinrea International
Inc          climbing 5.7 percent and Magna International Inc
        up 4.3 percent.
    At 3:21 p.m. (1921 GMT), the Canadian dollar          was
trading 0.5 percent higher at C$1.2964 to the greenback, or
77.14 U.S. cents. The currency touched its strongest since June
14 at C$1.2952.
    Gains for the loonie came despite Bank of Canada Governor
Stephen Poloz playing down on Friday the recent jump in
inflation. The rise in inflation to a nearly seven-year high of
3 percent in July was due to transitory factors, Poloz said in
an interview in Jackson Hole, Wyoming.             
    The price of oil, one of Canada's major exports, was
supported by a strengthening equities market and news of the
trade deal between the U.S. and Mexico.             
    U.S. crude oil futures        settled 0.2 percent higher at
$68.87 a barrel.
    Canadian government bond prices were lower across a steeper
yield curve, with the two-year            down 3.5 Canadian
cents to yield 2.139 percent and the 10-year             falling
33 Canadian cents to yield 2.298 percent.
    The gap between Canada's 10-year yield and its U.S.
equivalent narrowed by 1.7 basis points to a spread of 55.0
basis points in favor of the U.S. bond, its smallest gap since
May 22. 
    Canada's gross domestic product data for the second quarter
is due on Thursday.

 (Reporting by Fergal Smith; Editing by Lisa Shumaker)