CANADA FX DEBT-C$ rallies as BoC hikes rates despite NAFTA cloud

 (New throughout)
    * Canadian dollar at C$1.2387, or 80.73 U.S. cents
    * Loonie touches its strongest since Jan. 5 at C$1.2362
    * Bond prices mixed across the yield curve
    * Canada-U.S. 2-year spread widens by 2.9 basis points

    By Fergal Smith
    TORONTO, Jan 17 (Reuters) - The Canadian dollar strengthened
to a 12-day high against the greenback on Wednesday after the
Bank of Canada hiked interest rates and indicated confidence in
the outlook for the economy, even as it sounded a cautious tone
on the future of NAFTA.
    The central bank raised its benchmark interest rate by 25
basis points to 1.25 percent, as expected, after recent data
showed strong job growth and firmer inflation.    
    The loonie initially fell as the bank's worries about
prospects for the North American Free Trade Agreement dented
expectations for additional rate increases.           
    Canada, which sends about 75 percent of its exports to the
United States, is increasingly convinced U.S. President Donald
Trump will soon announce that the United States intends to pull
out of NAFTA.
    But the "balanced tone" of a press conference with Bank of
Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn
Wilkins helped the currency recover, said Eric Theoret, currency
strategist at Scotiabank.
    "They were really quick to highlight a lot of the positive
and constructive developments that made them optimistic about
the forecast and the outlook for the economy," Theoret said.
    The central bank raised its forecast for 2018 growth to 2.2
percent from 2.1 percent, while it also bumped up its forecast
for 2019, after an estimated 3.0 percent expansion in 2017.
    At 2:46 p.m. EST (1946 GMT), the Canadian dollar         
was trading 0.4 percent higher at C$1.2387 to the greenback, or
80.73 U.S. cents.
    The currency's weakest level of the session was C$1.2540,
while it touched its strongest since Jan. 5 at C$1.2362.
    The price of oil, one of Canada's major exports, rose ahead
of the release of U.S. petroleum data that was expected to show
a ninth straight weekly drawdown in crude inventories.
    Canadian government bond prices were mixed across the yield
curve, with the two-year            up 2 Canadian cents to yield
1.764 percent and the 10-year             falling 15 Canadian
cents to yield 2.19 percent.
    The gap between the two-year yield and its U.S. counterpart
widened by 2.9 basis points to a spread of -27.4 basis points,
its widest since Dec. 15.

 (Reporting by Fergal Smith; Editing by Frances Kerry and Tom