CANADA FX DEBT-C$ nears 10-month high as jobs gain boosts rate hike chances

    * Canadian dollar at C$1.2894, or 77.56 U.S. cents
    * Loonie touches its strongest since Sept. 8 at C$1.2888
    * Bond prices lower across a steeper yield curve
    * 10-year yield reaches a two-year high at 1.886 percent

    By Fergal Smith
    TORONTO, July 7 (Reuters) - The Canadian dollar strengthened
on Friday to a nearly 10-month high against its U.S. counterpart
after stronger-than-expected domestic jobs data boosted chances
of an interest rate increase  by the Bank of Canada as soon as
next week.
    Canada's economy added 45,300 jobs last month, topping the 
10,000 gain forecast by economists. The unemployment rate dipped
to 6.5 percent, even as more people were looking for work.
    "It is a pretty solid report ... if you were leaning toward
a hike in July this would do nothing to dissuade you," said
Andrew Kelvin, senior rates strategist at TD Securities.
    Chances of an increase at next week's rate meeting rose to
91 percent from 86 percent before the jobs report, data from the
overnight index swaps market showed.           
    Expectations of a rate increase have been rising since top
Bank of Canada officials said in June that a pair of 2015
interest rate cuts had done their job in cushioning the economy
from collapsing oil prices.             
    At 9:24 a.m. ET (1324 GMT), the Canadian dollar          was
trading at C$1.2894 to the greenback, or 77.56 U.S. cents, up
0.7 percent.
    The currency's weakest level of the session was C$1.2994,
while it touched its strongest since Sept. 8 at C$1.2888.
    The loonie strengthened even as prices of oil, one of
Canada's major exports, fell.
    U.S. crude        was down 1.82 percent at $44.69 a barrel
after data showed U.S. production rose last week just as
Organization of the Petroleum Exporting Countries exports hit a
2017 high, casting doubts on efforts by producers to curb
    The U.S. dollar        rose against a basket of major
currencies after U.S. job growth surged more than expected in
June and employers increased hours for workers, signs of labor
market strength that could keep the Federal Reserve on course
for a third interest rate increase this year despite benign
    Canadian government bond prices were lower across a steeper
yield curve, with the two-year            down 4 Canadian cents
to yield 1.165 percent and the 10-year             falling 41
Canadian cents to yield 1.881 percent.
    The 10-year yield reached its highest intraday since June
2015 at 1.886 percent, while the gap between the two-year yield
and its U.S. equivalent narrowed by 2.6 basis points to -23.8
basis points, its narrowest since Oct. 18, as Canadian
government bonds underperformed.

 (Editing by Steve Orlofsky)