CANADA FX DEBT-Loonie rallies as muted U.S. wage inflation spurs risk appetite

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    * Canadian dollar rises 0.4% against the greenback
    * Loonie touches its weakest intraday since April 26 at
    * Price of U.S. oil increases 0.2%
    * Canada-U.S. 2-year spread hits narrowest in nearly three

    By Fergal Smith
    TORONTO, May 3 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Friday, recovering from an
earlier one-week low as the U.S. jobs report pointed to solid
economic growth but tame inflation that could keep the Federal
Reserve from raising interest rates.
     U.S. Treasury yields fell and stocks on Wall Street rose
after the jobs data as investors focused on wage inflation that
was muted even as nonfarm payrolls increased by 263,000 jobs
last month.             
    "What traders are keying off today is this pretty healthy
risk-on result after that rather perfect jobs report," said
Michael Goshko, corporate risk manager at Western Union Business
    "As long as average hourly earnings don't spike and perhaps
give the Fed concern that it might bleed into overall inflation
they can be accommodative on interest rates," Goshko said.
    Canada sends about 75 percent of its exports to the United
States, including many commodities such as crude oil.
    Still, the usual tight link between the loonie and U.S.
stocks has waned since March as investors pay more attention to
domestic economic headwinds than signs of improved prospects for
the U.S. economy.             
    At 4:00 p.m. (2000 GMT), the Canadian dollar          was
trading 0.4% higher at 1.3425 to the greenback, or 74.49 U.S.
cents. The currency's strongest level of the session was 1.3406,
while it touched its weakest since April 26 at 1.3492.    
    For the week, the loonie was up 0.2% despite domestic data
showing a decline in February GDP and that factory activity
contracted for the first time in more than three years in April.
    Data from the U.S. Commodity Futures Trading Commission and
Reuters calculations showed that speculators cut their bearish
bets on the Canadian dollar for the second straight week. As of
April 30, net short positions had fallen to 46,745 contracts
from 47,493 in the prior week.
    U.S. crude oil futures        settled 0.2% higher at $61.94
a barrel.                 
    The Canadian dollar is set to strengthen over the coming
year, helped by higher oil prices, but the currency's gains will
be held back by the greater interest rate offered to holders of
U.S. dollars, a Reuters poll showed.             
    Canadian government bond prices edged lower across the yield
curve, while the gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 2.7 basis points to a spread of 69.8
basis points in favor of the U.S. bond, its narrowest gap since
Feb. 8.

 (Reporting by Fergal Smith; editing by Jonathan Oatis and
Sandra Maler)