CANADA FX DEBT-C$ weakens as slumping oil prices offset strong GDP data

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    * Canadian dollar at C$1.3507, or 74.04 U.S. cents
    * Loonie touches its weakest since May 24 at C$1.3523
    * For the month, the loonie rises 1.1 percent
    * 10-year yield touches a six-month low at 1.398 percent

    By Fergal Smith
    TORONTO, May 31 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Wednesday as a drop in oil
prices offset data showing strength in the domestic economy.    
    Canada's gross domestic product grew at an annualized 3.7
percent pace, slightly below economists' expectations for 3.9
percent, although growth in both the third and fourth quarters
of 2016 was revised upward.             
    The economy also appeared to have solid momentum heading
into the second quarter, with growth rising by a
better-than-expected 0.5 percent in March.
    "If we continue to get growth numbers like this ... it's
going to be tougher for the Bank of Canada to avoid rate hikes
at some point in the distance," said Derek Holt, head of capital
markets economics at Scotiabank.
    The central bank last week kept interest rates on hold at
0.5 percent, but struck a more upbeat tone than investors had
    Chances of a Bank of Canada rate hike this year have
increased to 30 percent from roughly 1-in-10 before the interest
rate decision, data from the overnight index swaps market
    U.S. crude oil futures        settled 2.7 percent lower at
C$48.32 a barrel despite Organization of the Petroleum Exporting
Countries-led output cuts to reduce a global glut. Output from
OPEC rose in May, the first monthly increase this year, a
Reuters survey found.      
    Oil is one of Canada's major exports. Weakening in the
commodity could push speculators to add to bearish bets on the
Canadian dollar, said Hendrix Vachon, senior economist at
    Speculators increased net short positions in the Canadian
dollar to a record high as of May 23, recent data from the
Commodity Futures Trading Commission and Reuters calculations
    At 4 p.m. (2000 GMT), the Canadian dollar          was
trading at C$1.3507 to the greenback, or 74.04 U.S. cents, down
0.4 percent.
    The currency's strongest level of the session was C$1.3438,
while it touched its weakest since May 24 at C$1.3523.
    Still, the loonie rose 1.1 percent for the month.   
Canadian government bond prices were mixed across the yield 
curve, with the two-year            up 1 Canadian cent to yield
0.695 percent and the 10-year             falling 1 Canadian
cent to yield 1.416 percent.
    The 10-year yield touched its lowest intraday since Nov. 10
at 1.398 percent.
    Canada's trade data for April is due on Friday.         

 (Additional reporting by Alastair Sharp; Editing by Meredith
Mazzilli and Peter Cooney)