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CANADA FX DEBT-C$ hits fresh 14-month high; speculators turn bullish

(Adds analyst quotes, details throughout; updates prices)

* Canadian dollar at C$1.2538, or 79.76 U.S. cents

* October rate hike chances rise

* Bond prices little changed across much of yield curve

* Canada-U.S. 10-year spread hits narrowest since June 2016

TORONTO, July 21 (Reuters) - The Canadian dollar climbed against its U.S. counterpart on Friday, touching 14-month highs as strength in domestic retail sales offset lower oil prices, while data showed that investors have turned bullish on the currency. Speculators were net long 8,043 Canadian dollar contracts as of July 18, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. In the prior week, they were net short 8,604 contracts and bearish bets had set a record high in May. "There is still plenty of room for the Canadian dollar longs to pile in," said Adam Button, currency analyst at ForexLive. "Despite a Canadian dollar rally, it is by no means a crowded trade." Retail sales rose by 0.6 percent in May from April, a sign of strength that analysts said boosts the case for another interest rate hike from the Bank of Canada despite data showing persistently weak inflation. Canada's annual inflation rate slowed to a 20-month low of 1.0 percent in June, although core measures showed signs of strength. The Bank of Canada last week raised its key rate to 0.75 percent, the first increase since September 2010. Chances of a second hike in October climbed above 70 percent from a roughly two-thirds chance before the economic reports, data from the overnight index swaps market showed. Still, Canada's bond market is signaling the Bank of Canada will not reach its 2 percent inflation target anytime soon. That suggests the central bank is unlikely to pull off more than one more rate hike even as money markets see further tightening into 2018.

At 4 p.m. EDT (2000 GMT), the Canadian dollar was

trading at C$1.2538 to the greenback, or 79.76 U.S. cents, up 0.4 percent. The currency touched its strongest level since early May 2016 at C$1.2522. For the week, Canada's dollar rose 0.9 percent. "The Canadian dollar is running on fumes at this point," Button said. "The past week has been more about U.S. dollar weakness than Canadian dollar strength." The loonie rose even as prices of oil, one of Canada's major

exports, fell. U.S. crude prices settled 2.5 percent

lower at $45.77 a barrel. Canadian government bond prices were little changed across much of the yield curve.

The 10-year was flat to yield 1.882 percent. But

the gap between the 10-year yield and its U.S. equivalent narrowed by 2.7 basis points to a spread of -35.7 basis points, its narrowest since June 2016.

(Editing by G Crosse)