CANADA FX DEBT-Canadian dollar strengthens to 12-day high on trade deal optimism

By Fergal Smith

TORONTO, Oct 22 (Reuters) - The Canadian dollar strengthened to a near two-week high against its U.S. counterpart on Wednesday as oil prices rose and investors grew hopeful of a trade deal between the United States and Canada.

The loonie CAD= was trading 0.3% higher at 1.3980 per U.S. dollar, or 71.53 U.S. cents, after touching its strongest intraday level since October 10 at 1.3977.

"There’s been a high degree of pessimism towards CAD over the last few months which has stemmed from worsening sentiment on US-Canada trade. This has led CAD to underperform significantly against most G10 currencies in recent months," said Noah Buffam, an FX strategist at CIBC Capital Markets.

"Yesterday’s news that a US-Canada trade deal focused on metals and energy could be signed soon has caused a shift in this sentiment."

On Tuesday, Canadian Prime Minister Mark Carney expressed caution after a newspaper reported he might soon sign a trade deal on steel and aluminum with the United States. The two sides have been in talks for weeks on a potential metals deal.

Hotter-than-expected Canadian inflation data on Tuesday has also given the loonie a boost, say analysts.

Still, investors expect the Bank of Canada to cut interest rates further at a policy decision next Wednesday. Last month, the central bank lowered its benchmark rate to a three-year low of 2.50%.

The price of oil CLc1, one of Canada's major exports, increased 2.6% to $58.72 a barrel on growing U.S. energy consumption and hopes of progress for a U.S. trade deal with China and India.

Canadian bond yields were mixed across the curve, with the 10-year CA10YT=RR down half a basis point at 2.647%.