* Canadian dollar rallies off key technical level
* Canadian factory sales slide more than expected
* Bond prices relinquish gains made early this week
By Frank Pingue
TORONTO, Oct 16 (Reuters) - The Canadian dollar was slightly higher versus the U.S. dollar on Thursday morning, rallying back after it dropped to a key technical level during the overnight session.
Canadian bond prices were pinned lower across the curve as demand for secure assets eased along with credit conditions.
At 9:45 a.m. (1345 GMT), the Canadian unit was at C$1.1867 to the U.S. dollar, or 84.27 U.S. cents, up from C$1.1879 to the U.S. dollar, or 84.18 U.S. cents, at Wednesday's close.
The currency rallied as it attracted a slew of buying interest after it touched an overnight low of C$1.1990 to the U.S. dollar, or 83.40 U.S. cents.
"With the inability to break above that we saw some sellers of dollar Canada returning to the markets and at the same time the oil price improving again from its low," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
Holding the Canadian dollar back from rising higher was data that showed Canadian manufacturing sales fell nearly four times more than expected in August.
Strauss said the Canadian dollar could retest its overnight low if U.S. weekly oil inventory data due out at 11:00 a.m. (1500 GMT) comes in ahead of expectations.
"If oil inventories increase higher than expected that could send oil prices down and with it drive the Canadian dollar down." he said.
Dragging the Canadian currency down early in the overnight session was a combination of concerns that the global economy is teetering on the verge of recession coupled with a slide in oil prices to a 13-month low before rebounding slightly.
Since Canada is the main supplier of oil to the United States, and commodities make up about half of Canadian exports, the currency often follows the direction of oil prices.
BOND PRICES DROP
Canadian bond prices were down across the curve as lower rates for interbank lending sapped demand for government debt as investors returned to more risky forms of investments.
Bond prices drew support from stock index futures that had suggested gains in equity markets.
"Given the volatility in equity markets and the weakness overseas, there is a lot of uncertainty whether that gain will be sustained through trading this morning," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
"So concerns about credit tightening and the impact on the economy will dominate thinking and trends in fixed income markets."
The Canadian overnight Libor rate LIBOR01 was 3.175 percent, down from 3.425 percent on Wednesday.
Wednesday's CORRA rate CORRA= was 2.5114 percent, up from 2.5021 percent on Tuesday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond was down 7 Canadian cents at C$100.93 to yield 2.297 percent. The 10-year bond was off 5 Canadian cents at C$103.95 to yield 3.756 percent.
The yield spread between the two-year and the 10-year bond moved to 120 basis points from 123 basis points at the previous close.
The 30-year bond was down 20 Canadian cents at C$113.25 to yield 4.199 percent. In the United States, the 30-year Treasury yielded 4.226 percent. (Editing by Peter Galloway)