CANADA FX DEBT-C$ sets 12-year low on risk aversion, lower crude prices

* Canadian dollar at C$1.4075, or 71.05 U.S. cents
    * Currency hit a fresh 12-year low
    * Bond prices higher across the maturity curve

    TORONTO, Jan 6 (Reuters) - The Canadian dollar set a 12-year
low against its U.S. counterpart on Wednesday after risk
aversion hit financial markets and crude oil prices tumbled,
overshadowing an improvement in Canada's trade deficit.
    Canada posted a smaller-than-expected trade deficit of
C$1.99 billion in November from a revised C$2.49 billion gap in
October on increased exports to the United States, data from
Statistics Canada showed. 
    "It's a step in the right direction," said BMO Capital
Markets senior economist Sal Guatieri. 
    North Korea's reported successful nuclear test and further
weakening in China's yuan after data showed the nation's
services Purchasing Managers' Index expanded at its slowest rate
in 17 months weighed on sentiment.  
    Oil prices slid to set 11-year lows on Wednesday as the row
between Saudi Arabia and Iran made any cooperation between major
exporters to cut output even less likely. 
    U.S. crude prices were down 3.89 percent at $34.57 a
barrel, while Brent crude lost 4.89 percent to
    Meanwhile, stronger-than-expected U.S. private employment
data for December helped support the greenback. 
    At 9:19 a.m. EST (1419 GMT), the Canadian dollar 
was trading at C$1.4075 to the greenback, or 71.05 U.S. cents,
weaker than the Bank of Canada's official close of C$1.3989, or
71.48 U.S. cents.
    The currency's strongest level of the session was C$1.3973,
while it hit its weakest level since August 2003 at C$1.4109.
    The weaker Canadian dollar is the main reason behind
improvement in Canada's trade balance, according to Guatieri,
although continued growth in U.S. demand also helped.
    "The currency's impact on growth should improve through the
year," Guatieri added.
    Canadian government bond prices were higher across the
maturity curve on the flight to safety, with the two-year
 price up 2.5 Canadian cents to yield 0.437 percent
and the benchmark 10-year rising 33 Canadian cents
to yield 1.339 percent.
    The curve flattened, as the spread between the 2-year and
10-year yields narrowed by 2.4 basis points to 90.2 basis
points, indicating outperformance for longer-dated maturities.
    The Canada-U.S. 10-year bond spread was 2.8 basis points
narrower at -84.6 basis points as Treasuries outperformed.

 (Reporting by Fergal Smith; Editing by Lisa Von Ahn)