CANADA FX DEBT-C$ rallies to 5-week high on NAFTA optimism, higher stocks

 (Adds strategist quotes and details on market activity, updates
    * Canadian dollar at C$1.2806, or 78.09 U.S. cents
    * Loonie touches its strongest since Feb. 28 at C$1.2782
    * Bond prices lower across the yield curve

    By Fergal Smith
    TORONTO, April 3 (Reuters) - The Canadian dollar
strengthened to a nearly five-week high against its U.S.
counterpart on Tuesday as oil and stock prices rebounded after
steep declines the day before, while investors grew more
optimistic about the prospect of a NAFTA trade deal. 
    The United States, Mexico and Canada have made significant
advances on reworking the North American Free Trade Agreement
and ministers will meet in the coming days to determine the
scope to agree on the basics of a deal, Mexico's economy
minister said on Monday.             
    "If there is a deal on NAFTA, we are likely to see the
Canadian dollar rally fairly strongly," said Scott Smith,
managing partner at Viewpoint Investment Partners. "The Bank of
Canada will feel more apt to hike at upcoming meetings this
    The central bank has raised its benchmark interest rate
three times since July to 1.25 percent but has worried about
uncertainties, including the outlook for trade.
    U.S. stocks rallied after crashing through key technical
levels in the previous session. Canada's commodity-linked
currency tends to be sensitive to movement in stock prices that
are influenced by the health of the global economy.             
    The price of oil, one of Canada's major exports, rose after
its biggest one-day fall in almost a year the previous day. U.S.
crude        prices settled 0.8 percent higher at $63.51 a
    At 4 p.m. (2000 GMT), the Canadian dollar          was
trading 0.8 percent higher at C$1.2806 to the greenback, or
78.09 U.S. cents. The loonie touched its strongest level since
Feb. 28 at C$1.2782.
    Data showing that sales of light vehicles in Canada dipped
0.6 percent in March added to signs the economy was on track for
a weaker-than-expected first quarter.             
    Still, fiscal stimulus from major provinces is set to give
Canada's economy a shot in the arm.             
    Canadian government bond prices were lower across the yield
curve in sympathy with U.S. Treasuries as demand faded for
safe-haven assets and investors looked ahead to Friday's closely
watched U.S. employment report.             
    The two-year            dipped 3 Canadian cents to yield
1.795 percent and the 10-year             declined 23 Canadian
cents to yield 2.143 percent. On Friday, the 10-year yield
touched its lowest intraday since Jan. 4 at 2.073 percent.
    Canadian trade data for February is due on Thursday and the
March employment report is due on Friday.

 (Reporting by Fergal Smith; Editing by Bernadette Baum and
Peter Cooney)