CANADA FX DEBT-Loonie nears eight-month high on surprise swing to trade surplus

 (Adds strategist quote, updates prices)
    * Canadian dollar rises 0.3% against the greenback
    * Canada posts May trade surplus of C$762 million
    * Price of U.S. oil increases 1.9%
    * Canada-U.S. 2-year spread hits narrowest since February

    By Fergal Smith
    TORONTO, July 3 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Wednesday, approaching a near
eight-month high notched last week, as oil prices rose and
domestic data showed a surprise swing in the trade balance to a
surplus in May.
    Rising exports of motor vehicles, aircraft and energy
products helped Canada post a C$762 million trade surplus in
goods in May, Statistics Canada reported. Analysts had forecast
a shortfall of C$1.50 billion, while April's deficit was revised
slightly wider to C$1.08 billion.             
    The trade data gave the loonie a small lift in "very quiet 
trading" ahead of the U.S. Independence Day holiday on Thursday,
said Eric Theoret, a currency strategist at Scotiabank.   
    The price of oil, one of Canada's major exports, rebounded
after a steep fall in the previous session when a decision by
OPEC and its allies to extend output cuts failed to counter
investors' concerns about the slowing global economy. U.S. crude
oil futures        settled 1.9% higher at $57.34 a barrel.
    At 3:41 p.m. (1941 GMT), the Canadian dollar          was
trading 0.3% higher at 1.3064 to the greenback, or 76.55 U.S.
cents. The currency, which last Friday touched nearly an
eight-month high at 1.3060, traded in a range of 1.3062 to
    The loonie has benefited in recent weeks from data showing a
recovery in the domestic economy, which could keep the Bank of
Canada on hold over the coming months even if the Federal
Reserve cuts interest rates as the market expects. Money markets
see about a 30% chance of a Bank of Canada interest rate cut
this year.           
    A clue to the direction of Canadian interest rates could
come from Canada's jobs report for June, which is due on Friday.
    Canadian government bond prices were mixed across a flatter
yield curve, with the two-year            down 2 Canadian cents
to yield 1.493% and the 10-year             rising 13 Canadian
cents to yield 1.453%.
    The gap between Canada's two-year yield and its U.S.
equivalent narrowed by 1.5 basis points to a spread of 26.8
basis points in favor of the U.S. bond, its narrowest gap since
February last year.       

 (Reporting by Fergal Smith; Editing by Peter Cooney)