CANADA FX DEBT-Canadian dollar strengthens as oil rallies

* Canadian dollar at C$1.3357, or 74.87 U.S. cents
    * Bond prices lower across steeper yield curve

    By Fergal Smith
    TORONTO, Oct 27 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Thursday as oil rose, while a
breakthrough on a free-trade agreement with the European Union
improved the longer term outlook for the loonie.
    Belgium agreed a deal with its regional parliaments on to
approve a landmark EU-Canada free trade agreement, breaking a
deadlock that has blocked the pact for weeks. 
    "I doubt it is going to have that much impact (on the
Canadian dollar) from a short-term point of view. From a much
longer term perspective it's positive in that it should help
Canada diversify its export penetration," said Shaun Osborne,
chief currency strategist at Scotiabank.
    U.S. crude prices were up 0.87 percent at $49.61 a
barrel as a further drop in U.S. crude inventories countered
investor doubts that the Organization of the Petroleum Exporting
Countries will be able to implement a production cut. 
    At 9:26 a.m. EDT (1326 GMT), the Canadian dollar 
was trading at C$1.3357 to the greenback, or 74.87 U.S. cents,
stronger than Wednesday's close of $1.3382, or 74.73 U.S. cents.
    The currency's strongest level of the session was C$1.3353,
while its weakest was C$1.3395.
    On Monday, it touched its weakest against the greenback in
seven months at C$1.3398, after the Bank of Canada acknowledged
last week that it had considered cutting interest rates at its
policy meeting.
    New orders for U.S. manufactured capital goods unexpectedly
fell in September amid weak demand for computers and electronic
products, which could temper expectations for an acceleration in
business spending in the fourth quarter. 
    Weak U.S. business investment has hampered a long-awaited
pick-up in growth of Canada's non-energy exports. 
    Canadian government bond prices were lower across the yield
curve in sympathy with U.S. Treasuries. The two-year 
price fell 4 Canadian cents to yield 0.578 percent and the
benchmark 10-year declined 48 Canadian cents to
yield 1.212 percent.
    The curve steepened as the spread between the two-year and
10-year yields widened by 3.2 basis points to its most since
June at 63.4 basis points, indicating underperformance for
longer-dated bonds.
    Losses for core sovereign debt markets came after data
showed Britain's economy slowed only slightly in the three
months after the Brexit vote. 

 (Reporting by Fergal Smith; Editing by Bill Trott)