CANADA FX DEBT-C$ drops on oil, jump in current account deficit

* Canadian dollar at C$1.2550 or 79.68 U.S. cents
    * Bond prices mixed across the maturity curve

    By Solarina Ho
    TORONTO, March 2 (Reuters) - The Canadian dollar dropped
against its U.S. counterpart on Monday, pushed down by lower oil
prices and data that showed the country's current account
deficit growing faster than expected.
    Crude prices dropped after Iran said a deal on its nuclear
program could be reached this week if the West lifts sanctions,
a move that could boost the country's oil exports. 
    The price of crude, a key Canadian export, has been under
pressure due to excess supply and lukewarm demand. While oil
prices had their first monthly gain since last June in February,
U.S. prices are still below $50 a barrel. 
    Cheap oil helped drive Canada's current account gap to
C$13.92 billion in the fourth quarter from C$9.6 billion in
previous quarter, according to government data on Monday. That
was the biggest deficit in a year, and exceeded
    Crude's drop has also hit business confidence with activity
in Canada's manufacturing sector contracting last month to its
lowest level on record, according to RBC's Canadian
Manufacturing Purchasing Managers' index (PMI), putting more
pressure on the currency. 
    The Canadian dollar, which was a touch stronger
ahead of the data, fell to C$1.2550 to the greenback, or 79.68
U.S. cents, at 9:56 a.m. EST (1456 GMT), weaker than Friday's
close of C$1.2496, or 80.03 U.S. cents.
    Looking ahead, Canadian growth data for the fourth quarter
due on Tuesday and the Bank of Canada's latest interest rate
decision on Wednesday will be in focus. The bank cut its
benchmark rate by 25 basis points in January to 0.75 percent.
    The markets had priced in as much as an 80 percent chance of
another 25 basis point rate cut this week before comments by
bank Governor Stephen Poloz dispelled those expectations.
Markets are now looking at about a 30 percent chance of a cut.
    "I think if the bank comes out suggesting they're leaving
door open for rate cuts, the currency may be a touch weaker on
that news," said Mark Chandler, head of Canadian fixed income
and currency strategy at RBC Capital Markets.
    Canadian government bond prices were mixed across the
maturity curve, with the longer term securities lower. The
two-year was off 1 Canadian cent to yield 0.475
percent and the benchmark 10-year down 23 Canadian
cents to yield 1.325 percent.

 (Reporting by Solarina Ho; Editing by Peter Galloway)