CANADA FX DEBT-C$ nears 3-month high on trade deal prospects

    * Canadian dollar at C$1.2903, or 77.50 U.S. cents
    * Loonie touches its strongest since June 6 at C$1.2895
    * Bond prices lower across steeper yield curve
    * Canada-U.S. 10-year spread hits narrowest since Feb. 15

    TORONTO, Aug 28 (Reuters) - The Canadian dollar strengthened
to a nearly three-month high against its U.S. counterpart on
Tuesday on the prospect of Canada reaching a deal this week to
overhaul the North American Free Trade Agreement.
    U.S. Treasury Secretary Steve Mnuchin said he believed the
United States can reach a trade deal with Canada this week after
coming to an agreement with Mexico.             
    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.
    Canadian Foreign Minister Chrystia Freeland will travel to
Washington on Tuesday to continue negotiations. A spokesman for
Freeland said on Monday that Canada would only sign a new
agreement that is good for the country.                 
    Shares of Canadian auto-parts manufacturers rallied on
Monday even as U.S. President Donald Trump threatened he could
put tariffs on Canadian-made cars if a three-way deal could not
be reached.             
    At 9:05 a.m. (1305 GMT), the Canadian dollar          was
trading 0.5 percent higher at C$1.2903 to the greenback, or
77.50 U.S. cents. The currency touched its strongest since June
6 at C$1.2895.
    The price of oil, one of Canada's major exports, rose
towards its highest since early July, on evidence of
still-modest increases in output from OPEC and improving Chinese
refinery demand.
    U.S. crude        prices were up 0.1 percent at $68.95 a
    Canadian government bond prices were lower across a steeper
yield curve, with the two-year            down 2.5 Canadian
cents to yield 2.153 percent and the 10-year             falling
24 Canadian cents to yield 2.326 percent.
    The gap between Canada's 10-year yield and its U.S.
equivalent narrowed by 0.8 points to a spread of 54.3 basis
points in favor of the U.S. bond, its smallest gap since Feb.
    Canada's gross domestic product data for the second quarter
is due on Thursday.        

 (Reporting by Fergal Smith
Editing by Susan Thomas)