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* C$ hits session high of C$0.9564, or $1.0456
* C$ pares gains ahead of U.S. non-farm payroll data
* Bonds fall across curve on expectation of firm U.S. data
By Solarina Ho
TORONTO, July 8 (Reuters) - The Canadian dollar firmed to a session high against the U.S. dollar on Friday following unexpectedly strong Canadian employment data, before paring gains to trade flat ahead of key U.S. jobs figures.
The domestic economy generated a surprising 28,400 jobs in June, compared with the 15,000 expected by markets and contrasted with other signs the economic growth was starting to slow. The unemployment rate held steady at 7.4 percent as more people entered the labor market. [ID:nN1E767019]
The overall strength of the report was seen increasing the possibility of a Bank of Canada rate hike later this year. Higher interest rates tend to help currencies by attracting international capital flows.
"It's certainly suggesting the domestic environment shows signs of strengthening. We did maybe see a bit of a pause through the second quarter, but this pick-up of employment late in the second, it bodes well for the rebound in the second half of the year," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
The currency CAD=D4 strengthened to a session high of C$0.9564 to the U.S. dollar, or $1.0456, up from C$0.9581 just prior to the data's release. It finished at C$0.9587 on Thursday.
At 7:35 a.m. (1135 GMT), the currency stood at C$0.9586 to the U.S. dollar, or $1.0432 ahead of the U.S. employment data at 8:30 a.m.
"I'd almost regard this as almost a neutral to ever so slightly positive report for the Canadian dollar," said Doug Porter deputy chief economist at BMO Capital Markets, adding that the movement in the dollar today was more likely to be determined by the tone of the U.S. jobs market data.
Overnight index swaps, which trade based on expectations for the key central bank rate, showed that traders priced in an increased probability of rate hikes in September, October and December, though a full 25-basis-point rate hike was not priced in until 2012. BOCWATCH
Canadian bond prices, especially at the short end of the curve, weakened after the data.
The Canadian government two-year bond CA2YT=RR was down 4 Canadian cents to yield 1.597 percent. It yielded 1.581 percent before the data. The 10-year bond CA10YT=RR lost 8 Canadian cents to yield 3.067 percent. (Additional reporting by Euan Rocha; Editing by Jeffrey Hodgson)