CANADA FX DEBT-C$ strengthens to 2-wk high as commodities surge

* C$ rises to C$0.9703 to US$, or $1.0306

* Touches strongest level since June 15

* Higher oil, commodity prices drive gains

* Unexpectedly high Canadian inflation data supports

* Bonds lower, Canada underperforms Treasuries

By Trish Nixon

TORONTO, June 29 (Reuters) - Canada’s dollar firmed by more than a penny to hit a two-week high on Wednesday, boosted by unexpectedly strong inflation data and the approval of a Greek austerity plan that fueled buying of commodity-linked currencies.

Commodities, global stocks and the euro all rose after Greece’s parliament approved a five-year austerity plan designed to prevent the country from going bankrupt. [MKTS/GLOB]

“It seems like we’re being dragged along by general risk-sentiment”, sad David Watt, senior currency strategist at RBC Capital Markets.

“Commodity prices are up. The U.S. dollar is a little bit weaker which isn’t hurting in that regard. As a result we are getting some expression of interest to buy commodity currencies back.”

Oil rose more than $2 per barrel and copper and hit its highest in nearly two months as risk appetite improved following the vote in Greece. [O/R] [MET/L]

The Canadian dollar was also supported by data showing Canadian inflation rose to its highest level in more than eight years in May, raising the prospect the central bank will raise interest rates sooner than previously expected. [ID:nN1E75S02V]

Overnight index swaps, which trade based on expectations for the key central bank rate, showed that traders priced in an increased probability of rate hikes later this year following the data, though a full 25-basis-point rate hike was not priced in until 2012. BOCWATCH

Higher interest rates tend to help a country’s currency appreciate because they often attract international capital flows.

Canadian inflation shot up to 3.7 percent in May, the highest rate since March 2003 and well above expectations and the Bank of Canada’s 2 percent target.

“The CPI numbers certainly took some of the gloom that have been weighing on markets for the last few days,” said Watt. But he noted that the Canadian dollar was only keeping pace with other commodity based currencies like the Australian and New Zealand dollars.

“There are still some lingering concerns about what might happen on the rates front in Canada going forward,” he said.

A Reuters poll on Wednesday showed half of Canada’s primary dealers -- the institutions that deal directly with the central bank as it carries out monetary policy -- have pushed back their forecast for the next Canadian rate hike over the past month. [CA/POLL]

Six of the 12 dealers still expect the Bank of Canada to keep interest rates unchanged until September as “substantial headwinds” cited by its top official could hinder the economy.

At 2:40 p.m. (1640 GMT), the currency CAD=D3 was at C$0.9703 to the U.S. dollar, or $1.0306, up from Tuesday's North American finish at C$0.9827 to the U.S. dollar, or $1.0176.

Shortly after the Greek austerity vote it had climbed as high as C$0.9689 to the U.S. dollar, it’s strongest level since June 15.

Canadian bond prices were mostly lower as investors moved away from the relative safety of government debt to dip back into riskier assets.

The two-year bond CA2YT=RR slipped 22 Canadian cents to yield 1.56 percent, while the 10-year bond CA10YT=RR gave back 83 Canadian cents to yield 3.09 percent.

Canadian bonds underperformed U.S. Treasuries. (Editing by Jeffrey Hodgson)