CANADA FX DEBT-C$ softens as NAFTA negotiations weigh

(Updates figures, adds strategist commentary, details on business outlook survey)

* Canadian dollar at C$1.2519 or 79.88 U.S. cents

* Bond prices higher across the maturity curve

TORONTO, Oct 16 (Reuters) - The Canadian dollar retreated against its U.S. counterpart on Monday, as tensions rise over negotiations to modernize NAFTA, with talks set to be extended. Canada and Mexico are grappling with tough demands by the United States to bring major changes to the North American Free Trade Agreement that are increasing the odds the pact will not survive. Canada sends about 75 percent of its exports to the United States, and its economy could suffer if the agreement is not renewed. "Negative NAFTA sentiment seemed to push USD/MXN as well as USD/CAD higher today in the early morning hours and we held onto those levels for the most part in both pairs," said Greg Anderson, global head of foreign exchange strategy for BMO Capital Markets in New York.

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

trading at C$1.2521 to the greenback, or 79.87 U.S. cents, down 0.4 percent. The currency traded between C$1.2471 and C$1.2558. The weakness came even as the price of crude, a major Canadian export, edged higher amid fighting in Iraq's Kirkuk oil region.

A Bank of Canada business survey released on Monday showed Canadian companies have seen capacity and labor market pressures intensify over the past year but has not yet hit their ability to meet demand. The survey results underscored expectations the bank will not raise interest rates next week. Over the weekend, Bank of Canada Governor Stephen Poloz said growth will slow as the economy approaches full capacity. While the economy overall has bounced back, there were still pockets of weakness, he added. Canada's economic performance in the first half of the year has put it at the top of the Group of Seven developed nations. Speculators have raised bullish bets on the loonie to the highest since November 2012, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday. As of Oct. 10, Canadian dollar net long positions had edged up to 76,392 contracts from 75,128 a week earlier. Canadian government bond prices were higher across the

maturity curve, with the two-year price up 3 Canadian

cents to yield 1.526 percent and the benchmark 10-year rising 8 Canadian cents to yield 2.03 percent. Canada's 2-year yield fell below its U.S. equivalent for the first time since Sept 1. The spread shifted 6 basis points to -1.6.

(Reporting by Solarina Ho; Editing by Jonathan Oatis)