CANADA FX DEBT-C$ strengthens with oil as trade deficit hits record

 (Adds dealer quote, details on activity; updates prices)
    * Canadian dollar at C$1.2858, or 77.77 U.S. cents
    * Canada's trade deficit widens in March to C$4.14 billion
    * Bond prices higher across flatter yield curve

    By Fergal Smith
    TORONTO, May 3 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Thursday as higher oil prices
offset data showing the trade deficit had widened to a record in
March, while investors awaited the U.S. employment report on
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading 0.2 percent higher at C$1.2858 to the greenback, or
77.77 U.S. cents. The currency traded in a range of C$1.2818 to
    The loonie has been in a holding pattern after hitting a
four-week low on Tuesday at C$1.2914.
    Investors may look to buy the loonie in the area around
C$1.29, said Darren Richardson, chief operating officer at
Richardson International Currency Exchange Inc.
    "I think we won't see a break of that (level) due to
stronger oil prices and more of a cautious tone from the Fed,"
Richardson said.
    The price of oil, one of Canada's major exports, was boosted
by OPEC production cuts and the potential for new U.S. sanctions
against Iran. U.S. crude oil futures        settled 0.7 percent
higher at $68.43 a barrel.             
    The Federal Reserve on Wednesday held interest rates steady.
    Some analysts interpreted its comments on inflation as a
signal it may allow price rises beyond its target, a stance that
would limit the need for it to embark on a more aggressive path
of tightening.             
    The U.S. dollar        dipped as investors took profits from
a rally that sent the greenback to its highest levels of the
year and awaited payrolls data for April.                
    Canada's trade deficit in March widened to a record C$4.14
billion, Statistics Canada said.             
    But economists said the data was not all bad news for the
economy, as exports rose and a surge in imports pointed to
strength in domestic demand.
    "Some of the investment-related products were up solidly as
were some of the consumer products," said Doug Porter, chief
economist at BMO Capital Markets. "It's not a clearcut message
for the Bank of Canada."
    Chances of an interest rate hike by July were little changed
after the data at about 75 percent, the overnight index swaps
market indicated.           
    Canadian government bond prices were higher across a flatter
yield curve, with the 10-year             rising 34 Canadian
cents to yield 2.325 percent.
    The gap between Canada's 10-year yield and its U.S.
counterpart widened by 2.2 bps to a spread of -62.3 basis

 (Reporting by Fergal Smith; Editing by Bernadette Baum and
Grant McCool)