CANADA FX DEBT-C$ rallies to two-week high after US fiscal deal

* C$ at C$0.9852 versus US$, or $1.0150
    * U.S. fiscal deal jolts interest in Canadian currency
    * Rise in line with moves in oil, gold, stocks
    * C$ hits almost nine-month high against Japanese yen

    By Alastair Sharp
    TORONTO, Jan 2 (Reuters) - The Canadian dollar gained
sharply against the U.S. dollar on Wednesday as investors
cheered a political deal reached in the U.S. Congress that
staved off measures that would likely have pushed Canada's main
trading partner into recession.
    The Canadian currency notched its biggest one-day gain since
Oct. 17 after U.S. lawmakers on Tuesday approved a plan to
prevent huge tax increases and delay spending cuts that were due
to kick in this month. 
    The deal also was followed by price jumps in gold, oil and
stocks.   But attention quickly turned to
issues left unresolved by the fiscal deal, such as the need to
increase the U.S. debt limit. 
    "They got past one hurdle but they're basically just halfway
there," said Greg Moore, foreign exchange strategist at TD
Securities. "While it does relieve a bit of short-term
uncertainty ... there is still certainly potential for risk
aversion to creep back in the coming months."
    The Canadian dollar closed at C$0.9852 to the
greenback, or $1.0150. It had ended 2012 near C$0.9925, or
$1.0076, at 4 p.m. Eastern (2100 GMT) on Monday, according to
Thomson Reuters data.
    The currency reached C$0.9836, its strongest level against
the greenback since Dec. 18. It hit an almost nine-month high
against the slumping Japanese yen, touching 88.62 yen
at one point.
    While a deal was widely expected by investors, most placed
significant weight on a risk that no deal would be done in time.
    "It wasn't perceived as a done deal that the issue would be
resolved, although that was everyone's median case," said Adam
Cole, global head of foreign exchange strategy at Royal Bank of
    "It's the removal of that 20 to 30 percent probability (of
no deal) the market was priced for that's resulted in the price
move," he said.
    Beyond the immediate boost to assets considered more risky,
such as the Canadian dollar, Cole said the deal would also shine
a more positive light on upcoming economic data, including 
employment numbers due out on Friday. 
    "Markets will be prepared to take soft numbers and look
through them to the extent that they will be seen as having been
distorted by the imminence of the fiscal cliff," he said.
    Decent but not dazzling U.S. manufacturing data barely moved
the currency on Wednesday, while the euro was hurt versus the
Canadian dollar after data showed euro zone factories sank
deeper into recession in December.
    TD's Moore said the Canadian currency could weaken to C$1.03
versus the greenback in the first quarter due to the ongoing
U.S. political uncertainty and signs of weakness in the domestic
economy, but expects a slow comeback through the rest of year to
end 2013 around C$0.98.
    Canadian government debt yields were higher across the
curve, with the two-year bond off 5 Canadian cents to
yield 1.167 percent, while the benchmark 10-year bond
 fell 60 Canadian cents to yield 1.870 percent.