CANADA FX DEBT-C$ slides after BoC cautions on currency strength

* C$ at C$1.0463 to the U.S. dollar

* Bank of Canada holds rates, reiterates concern about C$

* Bond prices up across the curve, outperform U.S.

(Recasts, adds details, quote)

By Jennifer Kwan

TORONTO, Oct 20 (Reuters) - Canada's dollar fell by more
than a cent against the greenback on Tuesday after the Bank of
Canada held rates steady and warned the strong Canadian dollar
would "more than fully offset" favorable developments since
July.

As well, far from giving any suggestion of an early exit
from its extended low-rate strategy, it projected a three-month
delay -- to the third quarter of 2011 -- in the closing of the
output gap and the return of inflation to its 2 percent target.
[ID:nN19231469]

"They've strengthened their rhetoric on the pace of
appreciation in CAD, but left their expectations for monetary
policy on hold until Q2 2010," said Camilla Sutton, currency
strategist, Scotia Capital.

"This creates a knee-jerk dollar-Canada move higher, but
then the strength in the Canadian dollar will be able to resume
once we get through the knee-jerk part."

At 10:35 a.m. (1435 GMT), the Canadian unit was at C$1.0463
to the U.S. dollar, or 95.57 U.S. cents, down from C$1.0293 to
the U.S. dollar, or 97.15 U.S. cents, at Monday's close.

The currency was trading at around C$1.0320, or 96.90 U.S.
cents just before the announcement.

The Canadian dollar has rallied as much as 28 percent off
the four-year low it tumbled to in March, hitting C$1.0207 to
the U.S. dollar, or 97.97 U.S. cents, last week.

Also weighing on the domestic currency was a drop in the
price of oil, a key Canadian export, to below $80 a barrel,
while gold prices were also lower. [O/R] [GOL/]

BOND PRICES HIGHER

Domestic bond prices rose across the curve, boosted by the
central bank's statement and prospect it will keep interest
rates lower for longer.

"Their expression in the strength in the currency, the
notion that they've extended the period of time that the output
gap will be closed by a quarter, they revised down their growth
outlook for 2011. Those factors are giving us a bit of a push
here," said Mark Chandler, fixed income strategist at RBC
Capital Markets.

The two-year bond CA2YT=RR climbed 21 Canadian cents to
C$99.43 to yield 1.526 percent, while the 30-year bond
CA30YT=RR shot 75 Canadian cents higher to C$117.95 to yield
3.928 percent. The two-year bond yielded 1.618 percent before
the Bank of Canada statement.

Canadian bonds mostly outperformed U.S. Treasuries, which
extended gains on weaker-than-expected U.S. economic data.
[US/]

The yield on the two-year Canadian government bond was 59
basis points above its U.S. counterpart, down from 66 basis
points at the close of trading on Monday.
(Reporting by Jennifer Kwan; Editing by Jeffrey Hodgson)