CANADA FX DEBT-Oil surge helps C$ counter Canada GDP contraction

(Adds strategist’s comment, updated prices)

* Canadian dollar at $1.2437, or 80.41 U.S. cents

* Bond prices higher across the maturity curve

TORONTO, May 29 (Reuters) - A surge in the price of crude oil helped keep the Canadian dollar steady on Friday, shrugging off data showing the Canadian economy contracted in the first quarter.

While bond markets rose after the gross domestic product data on bets that there is more of a chance that the Bank of Canada will cut interest rates this year, the currency’s early-session losses were canceled out as crude oil prices jumped almost 5 percent on Friday.

Canada is a major oil exporter.

“The bounce-back in oil prices, for now, has provided an offset to what was a pretty damning GDP report,” said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.

The Canadian dollar ended the session trading at C$1.2437 to the greenback, or 80.41 U.S. cents, just weaker than Thursday’s close of C$1.2435, or 80.42 U.S. cents. It slipped more than 1 percent over the week.

Canada’s economy suffered its biggest contraction in nearly six years in the first quarter with business investment and exports both falling as the country grappled with a steep decline in oil prices, Statistics Canada said.

With the data likely to bolster the view that Canada’s central bank will hold rates steady until well after its U.S. counterpart has begun a raising cycle, momentum is not on the side of the loonie, as Canada’s currency is colloquially known.

“It’s much more likely to weaken from here than strengthen,” said CIBC World Markets Chief Economist Avery Shenfeld. “The (U.S. Federal Reserve) is still talking about a rate hike this year, and that’s nowhere in sight for the Bank of Canada.”

RBC’s Chandler said he expects the loonie to weaken beyond C$1.30 by the third quarter as data readings on the economy likely remain weak.

Canadian government bond prices were higher across the maturity curve, with the two-year up 10 Canadian cents to yield 0.568 percent and the benchmark 10-year rising 48 Canadian cents to yield 1.623 percent.

The Canada-U.S. two-year bond spread was -3.7 basis points, while the 10-year spread was -49.8 basis points. (Reporting by Alastair Sharp; Editing by Lisa Von Ahn; and Peter Galloway)