CANADA FX DEBT-C$ relinquishes recent highs, factory data drags

* C$ at C$0.9712 vs US$, or $1.0297
    * Touched 13-month high early in session
    * Factory data fell 1.5 pct, vs expectations of 0.4 pct gain
    * Bond prices fall across curve

    By Solarina Ho
    TORONTO, Sept 14 (Reuters) - The Canadian dollar surrendered
gains against the U.S. currency on Friday, as grim manufacturing
sales data dampened some of the euphoria from the Federal
Reserve's aggressive new stimulus program.
    Canadian factory sales fell 1.5 percent in July from June
versus market expectations of a 0.4 percent gain, hurt by
weakness in most industries, but especially a drop in sales of
aerospace products, motor vehicles, and machinery, according to
government data. 
    "The trend ... has been pretty much a one way move higher
for the Canadian dollar. The manufacturing sales print this
morning was a particular reason more investors might have been
looking to take profit after really solid couple of month of
gains," said Greg Moore, FX strategist at TD Securities.
    The weak factory numbers come after the government reported
earlier this week that the country suffered its biggest trade
deficit on record in July. 
    "I think those two figures combined got investors stewing on
what the potential for the Canadian economy is," said Moore.
    The Canadian dollar finished at C$0.9712 versus its
U.S. counterpart, or $1.0297, weaker than Thursday's North
American session close at C$0.9683, or C$1.0327.
    Earlier in the session, it had touched a high of C$0.9633,
or $1.0381, it's strongest level since Aug. 4, 2011. The
currency tracked global markets overnight, which climbed higher
after the U.S. central bank announced a third round of monetary
easing on Thursday.
    The Fed said it will buy $40 billion a month of
mortgage-backed securities bonds until the labor market improves
    "There's been a lot of cash that's been sitting on the
sidelines for many many months now, so even if a small
percentage of that comes back into the market you're going to
see a tremendous movement in some of these risk-based assets,"
said Blake Jespersen, managing director of foreign exchange
sales at BMO Capital Markets.    
    The Canadian dollar has climbed nearly 8 percent against the
U.S. dollar from June lows and currency strategists have said
the currency is uncomfortably strong and technically overbought.
    Still, many think that with no major events in the very near
future to drive direction, Canada's dollar could hang on to
these levels for a while longer.
    "After something as big as the Fed yesterday, sometimes that
type of sentiment can actually linger for quite a while, so it
could be a risk-on theme for a little bit longer here," said
Moore, speculating the strength of the Canadian dollar could
spur the Bank of Canada to reconsider its hawkish message.
    Most of Canada's primary dealers expect the Bank of Canada
to hold interest rates steady until the second half of 2013 or
later, according to a Reuters poll taken on Friday. 
    The next major piece of Canadian economic data is the
inflation report on Friday, expected to show that price
pressures remain subdued. 
    Canadian government bond prices fell across the curve as
safe-haven assets continued to fall out of favor. The two-year
bond was down 7.5 Canadian cents to yield 1.204
percent, while the benchmark 10-year bond tumbled 85
Canadian cents, yielding 1.970 percent.