TORONTO (Reuters) - Stronger-than-expected manufacturing figures helped lift the Canadian dollar against the U.S. dollar on Friday, while bond prices took their cue from a rising U.S. Treasury market.
The Canadian dollar closed at C$1.0590 to the U.S. dollar, or 94.43 U.S. cents, up from C$1.0633 to the U.S. dollar, or 94.05 U.S. cents, at Thursday's close.
The U.S. dollar rallied against many major currencies overnight, including the Canadian dollar.
But that changed when morning data showed Canadian manufacturing sales rose by 2.1 percent in June from May -- more than double the market's expectation.
The currency jumped to C$1.0585 to the U.S. dollar, or 94.47 U.S. cents, immediately after the data release, and despite a midday pullback, it wound up hanging on to most of those gains.
"The data seems to have had a pretty profound impact on the Canadian dollar, the currency is really rallying in stark contrast to the trend we've seen over the last few weeks," said Eric Lascelles, economics and rates strategist at TD Securities.
"I have to say I'm a little bit surprised that it's managed to completely outweigh the softness in commodity prices, but it simply seems that some days commodity prices don't win," Lascelles added.
The strength in manufacturing, which directly accounts for about one-fifth of all economic activity, topped expectations of a 1 percent rise in sales, but some economists sounded a cautionary note.
"Today's report is marginally encouraging to us, but we think it is not plausible that Canada's manufacturing sector can grow sustainably with U.S. domestic demand contracting, Canadian domestic demand weakening and the CAD (Canadian dollar) still relatively strong," Merrill Lynch Canada economist David Wolf wrote in a research note.
Most of the June headline gain came from higher prices as refined energy and primary metal products are included, Wolf said.
Next week, market watchers will get to pore over the June wholesale trade report on Tuesday, June retail sales data on Wednesday, and the July consumer price index on Thursday.
These reports could tweak expectations about the Bank of Canada's remaining 2008 interest-rate decisions. Its last three policy announcement dates this year are September 3, October 21 and Dec 9.
Canadian bond prices rose slightly across the yield curve.
"You have a moderate rally in the U.S. and Canada is tracking that, but it's underperforming on the strong Canadian economic data," Lascelles said.
The two-year bond rose 2 Canadian cents to C$101.71 to yield 2.758 percent. The 10-year bond added 5 Canadian cents to C$105.55 to yield 3.572 percent.
The yield spread between the two-year and 10-year bond was 81.4 basis points, down from 83.5 basis points at the previous close.
The 30-year bond gained 25 Canadian cents to C$116.90 for a yield of 4.005 percent. In the United States, the 30-year treasury yielded 4.473 percent.
The three-month when-issued T-bill yielded 2.45 percent, unchanged from the previous close.
Reporting by Lynne Olver; Editing by Peter Galloway