CANADA FX DEBT-C$ posts biggest gain since January as rate cut bets recede

 (Adds details on BoC rate decision, updates prices)
    * Canadian dollar rises 0.9% against the greenback
    * Bank of Canada leaves benchmark rate on hold at 1.75%
    * Canada posts a C$1.12 billion trade deficit in July
    * Canada-U.S. 2-year spread hits narrowest since October

    By Fergal Smith
    TORONTO, Sept 4 (Reuters) - The Canadian dollar posted its
biggest gain in seven months against the greenback on Wednesday
on lowered expectations for a Bank of Canada interest rate cut
in October after the central bank's policy decision made no
mention of future moves.
    The bank held its benchmark interest rate at 1.75% as
expected but said the escalating U.S.-China trade war was doing
more damage to the global economy than it had forecast in July.
    "They haven't pigeon-holed themselves into an October cut,"
said Simon Harvey, FX market analyst for Monex Europe and Monex
Canada. "This is why the loonie is rallying."
    The central bank referred to deterioration in the world
trade outlook but also "heavily stressed the fact that the
Canadian economy has exceeded expectations in the last few
months," Harvey said.
    Chances of an interest rate cut in October fell to about 50%
from nearly 70% before the announcement, data from the overnight
index swaps market showed.
    Canada's economy expanded at a surprisingly strong
annualized rate of 3.7% in the second quarter, a pace much
higher than the Bank of Canada had predicted, thanks to a
resurgence in goods exports.             
    But data on Wednesday showed Canada's trade deficit was
wider than expected at C$1.12 billion in July, a sign that the
domestic economic boost from trade in the second quarter may not
be repeated.             
    At 2:53 p.m. (1853 GMT), the Canadian dollar          was
trading 0.9% higher at 1.3220 to the greenback, or 75.64 U.S.
cents, its biggest gain since Jan. 30.
    The currency, which hit on Tuesday its weakest intraday
level in 2-1/2 months at 1.3382, traded in a range of 1.3219 to
    Gains for the loonie came as the price of oil, one of
Canada's major exports, was boosted by a wider market pickup on
positive news from China's services sector, after three days of
losses due to fears about a weakening global economy.
    U.S. crude oil futures        settled 4.3% higher at $56.26
a barrel.
    Canadian government bond prices fell across the yield curve,
with the two-year            down 3.5 Canadian cents to yield
1.334% and the 10-year             falling 13 Canadian cents to
yield 1.128%.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 4.2 basis points to a spread of -10.4
basis points, its narrowest gap since October 2017.

 (Reporting by Fergal Smith; Editing by Steve Orlofsky, David
Gregorio and Richard Chang)