CANADA FX DEBT-C$ rallies after retail sales surprise

* C$ higher at C$0.9778 vs US$, or $1.0227
    * Bond prices turn negative across the curve
    * July retail sales jump by 0.7 percent

    By Claire Sibonney
    TORONTO, Sept 25 (Reuters) - The Canadian dollar turned
positive against its U.S. counterpart on Tuesday and bonds sold
off after data showed domestic retail sales in July rose much
more than expected.
    Canadian retail sales jumped by 0.7 percent from June to a
near record C$38.99 billion, in part due to higher sales of new
cars, far greater than the modest 0.1 percent advance forecast
by market analysts. 
    Following release of the data, Canada's currency hit a
session high of C$0.9765 versus the greenback, or $1.0241, from
around C$0.9795, or $1.0209, heading into the report.
    "With the data release you saw strengthening in the Canadian
dollar as well as a sell-off in fixed income, so it was
definitely seen by markets as a decent indicator of consumer
strength," said Emanuella Enenajor, economist at CIBC World
    "If anything it means consumers aren't on a downward
spiral," she added, but cautioned that the report doesn't change
the fact that consumers still face significant headwinds,
including the slow pace of hiring, decelerating consumer credit
and elevated debt loads. 
    Earlier in the session, uncertainty over Spain's next move
to tackle its funding problems had turned investors away from
riskier assets, including the Canadian dollar.
    Investors have been reluctant to place big bets after a
strong rally in global markets that followed the announcement of
new policies earlier this month by the world's major central
banks to stimulate growth and support efforts by Europe to
resolve its debt crisis.
    "I suspect that there is a need for a new trigger and a new
catalyst to the upside on the euro and for risk assets, and the
answer could be from Europe with the market really hoping that
we get at some point soon (from) Spain making the formal request
for a bailout," said Audrey Childe-Freeman, head of foreign
exchange strategy at BMO Capital Markets.
    "Until we get that I think we'll stay in a very kind of ...
cautious mood in the market. And from a Canadian dollar
perspective it means that we probably remain within the recent
    This week, Spain is expected to unveil new structural
reforms and its draft budget plan for 2013. Investors also await
results of stress tests on its banking sector.
    At 9:31 a.m. (1331 GMT), the Canadian dollar stood
at C$0.9778 versus the greenback, or $1.0227, firmer than
Monday's North American session finish at C$0.9788, or $1.0217.
    Childe-Freeman said Canadian dollar resistance was seen
around C$0.9730 and support around C$0.9800.
    U.S. consumer confidence figures due at 10 a.m. are also
expected to provide further direction.
    Canadian government bond prices turned negative across the
curve following the stronger-than-expected retail sales data.
The two-year bond fell 2 Canadian cents to yield
1.122 percent, and the benchmark 10-year bond lost
10 Canadian cents, yielding 1.827 percent.