CANADA FX DEBT-C$ softens against rallying US$; focus turns to Bank of Canada

(Updates with fresh comment, new details, and closing figures)
    * Canadian dollar at C$1.2535 or 79.78 U.S. cents
    * Bond prices mixed across the maturity curve

    By Solarina Ho
    TORONTO, March 2 (Reuters) - The Canadian dollar weakened on
Monday against a stronger greenback, which touched 11-year highs
against an index of major currencies on expectations the Federal
Reserve will hike interest rates this year in contrast to moves
by other major economies.
    Investor attention was also turning to the Bank of Canada's
latest interest rate decision on Wednesday. The bank cut its
benchmark rate by 25 basis points in January to 0.75 percent.
    "Everyone's waiting for Bank of Canada now ... We still see
broad downside risks for the Canadian dollar going forward, even
if they were to hold off this week," said Bipan Rai, director of
foreign exchange strategy at CIBC World Markets.
    "What's going to move the Canadian dollar forward are going
to be two main drivers: what the Bank of Canada is going to do
and what the Fed is going to do."
    The markets had priced in as much as an 80 percent chance of
another 25-basis-point rate cut this week before comments by
bank Governor Stephen Poloz dispelled those expectations.
Markets are now looking at a less than 30 percent chance of a
    The Canadian dollar finished at C$1.2535 to the
greenback, or 79.78 U.S. cents, weaker than Friday's close of
C$1.2496, or 80.03 U.S. cents.
    Rai said in the near term, the currency could revisit the
C$1.28 level hit in January. That was the loonie's weakest
performance against its U.S. counterpart in nearly six years.
    Domestically, cheap oil helped drive Canada's current
account gap to C$13.92 billion in the fourth quarter from C$9.6
billion in the previous quarter, according to government data on
Monday. That was the biggest deficit in a year, and exceeded
    The price of crude oil, a key Canadian export, has been
under pressure due to excess supply and lukewarm demand. While
oil prices had their first monthly gain since last June
in February, U.S. prices are still below $50 a barrel. 
    Crude's drop in recent months also hit business confidence
with activity in Canada's manufacturing sector contracting last
month to its lowest level on record, according to RBC's Canadian
Manufacturing Purchasing Managers' index. 
    Canadian government bond prices were mixed across the
maturity curve, with the longer-term securities lower. The
two-year was off 4.5 Canadian cent to yield 0.494
percent and the benchmark 10-year down 73 Canadian
cents to yield 1.375 percent.

 (Reporting by Solarina Ho; Editing by Peter Galloway and James