CANADA FX DEBT-C$ notches 7-week high as yield spreads narrow on trade data

 (Adds strategist comments, details on activity; updates prices)
    * Canadian dollar at C$1.2981, or 77.04 U.S. cents
    * Canada's exports rise 4.1 percent in June
    * Bond prices mixed across a flatter yield curve
    * Canada-U.S. 2-year spread hits narrowest level in two

    By Fergal Smith
    TORONTO, Aug 3 (Reuters) - The Canadian dollar strengthened
to a seven-week high against its U.S. counterpart on Friday
after domestic data showing a record high for exports helped
narrow the gap in yield between Canadian and U.S. bonds.
    Canadian exports shrugged off the effects of U.S. metals
tariffs to rise 4.1 percent in June, cutting the country's trade
deficit to its lowest level in 17 months at C$626 million.
    It was the second piece of domestic data this week that was
supportive of the loonie after data on Tuesday showed Canada's
economy grew by 0.5 percent in May.
    "I like the Canadian dollar," said Marc Chandler, global
head of currency strategy at Brown Brothers Harriman in New
York. "I think the Bank of Canada is probably the only other
major central bank that is going to be able to keep up with the
Fed in terms of monetary policy and you can see this in the
Canada-U.S. 2-year note yield differential."
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 2.3 basis points to a spread of 54.8
basis points in favor of the of the U.S. bond, its narrowest
since June 1.
     Money markets expect the Bank of Canada to hike interest
rates for the third time this year by December.           
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading 0.3 percent higher at C$1.2981 to the greenback, or
77.04 U.S. cents.
    The currency, which touched its strongest level since June
14 at C$1.2968, was on track to rise for the third straight
    Gains for the loonie on Friday came as U.S. job growth
slowed more than expected in July and China announced
retaliatory tariffs on $60 billion worth of U.S. goods.             
    The trade tensions fueled concerns about demand for oil, one
of Canada's major exports. U.S. crude oil futures        settled
0.7 percent lower at $68.49 a barrel.             
    Canada has its own trade feud with the United States and is
in talks with the United States and Mexico to revamp the North
American Free Trade Agreement.
    Mexican Economy Minister Ildefonso Guajardo said there were
"very good probabilities" Mexico and the United States would
resolve key issues in NAFTA trade talks next week, adding that
Canada would likely soon rejoin the negotiations.              
    Canadian government bond prices were mixed across a flatter
yield curve ahead of a civic holiday on Monday. The 10-year
            rose 12 Canadian cents to yield 2.353 percent.    

 (Reporting by Fergal Smith in Toronto
Editing by Meredith Mazzilli and Matthew Lewis)