CANADA FX DEBT-C$ hits 5-week low as trade data dims rate hike prospects

    * Canadian dollar at C$1.2542, or 79.73 U.S. cents
    * Loonie touches its weakest since Aug. 31 at C$1.2546
    * Canada's trade deficit widens in August to C$3.41 billion
    * Bond prices higher across the yield curve

    By Fergal Smith
    TORONTO, Oct 5 (Reuters) - The Canadian dollar weakened to a
five-week low against its U.S. counterpart on Thursday after
domestic data showing a drop in exports for the third straight
month further weakened prospects of another interest rate hike
this year from the Bank of Canada.
    Canada's trade deficit widened in August to C$3.41 billion
from a revised C$2.98 billion shortfall in July, as exports fell
for a third consecutive month, Statistics Canada said.
    "This is another disappointing trade report," said Ryan
Brecht, a senior economist at Action Economics.
    It suggests the Bank of Canada will not change rates this
month and reduces the chances of a rate hike in December, Brecht
    The central bank has raised rates twice since July. But the
chances of another hike this year dropped to 60 percent from 66
percent before the data, the overnight index swaps market
indicated. They were nearly 100 percent before Governor Stephen
Poloz signaled last week that a third hike was not imminent.
    At 9:19 a.m. ET (1319 GMT), the Canadian dollar          was
trading at C$1.2542 to the greenback, or 79.73 U.S. cents, down
0.5 percent.
    The currency's strongest level of the session was C$1.2463,
while it touched its weakest since Aug. 31 at C$1.2546.
    The price of oil, one of Canada's major exports, steadied on
expectations that Saudi Arabia and Russia would extend
production cuts.             
    U.S. crude        prices were up 0.24 percent at $50.10 a
    Canadian government bond prices were higher across the yield
curve, with the two-year            up 2.5 Canadian cents to
yield 1.52 percent and the 10-year             rising 15
Canadian cents to yield 2.103 percent.
    The gap between Canada's two-year yield and its U.S.
equivalent narrowed by 1.4 basis points to a spread of 3.7 basis
    Canada's September employment report is due on Friday.

 (Reporting by Fergal Smith; Editing by Bill Trott)