CANADA FX DEBT-C$ in modest retreat after soft U.S. data

* C$ at C$0.9865 vs.US$, or $1.0137
    * U.S. manufacturing data disappoints
    * Bank of Canada, ECB action, jobs key event risks
    * Quebec elections on Tuesday

    By Solarina Ho
    TORONTO, Sept 4(Reuters) - The Canadian dollar retreated
from recent highs against its U.S. counterpart on Tuesday, hurt
by disappointing U.S. manufacturing data, which showed the
economy of Canada's largest export market continues to struggle.
    The data, which also weighed on North American stock
markets, overshadowed an election in the province of Quebec in
which the separatist Parti Quebecois is expected to return to
    U.S. manufacturing shrank at its sharpest clip in more than
three years last month, while separate data showed exports and
hiring in the sector slumped in another shot to the country's
struggling economy. 
    "The data was soft. But the data pales in comparison with
the rest of the week's events in (terms of) data risk," said
Jack Spitz, managing director of foreign exchange at National
Bank Financial.
    On Wednesday, the Bank of Canada will be announcing its next
interest rate decision, while Canada and the U.S. will be
releasing employment data on Friday.            
    The central bank is expected to leave interest rates
unchanged, so investors are focused on whether Governor Mark
Carney will change the message that interest rates need to rise.
    "I think (Carney's) going to be cognizant of the strength in
Canadian dollar as being an economic headwind and ultimately his
guidance, while hawkish, will likely acknowledge the strength of
the Canadian dollar and that itself may mitigate some of the
gains by loonie going forward," said Spitz.
    Analysts there was limited impact from the election in
French-speaking Quebec, partly because Parti Quebecois is
expected to form a minority government, which would make it more
difficult for them to hold a referendum to separate from Canada.
    "Surprisingly enough, very few people are talking about that
... I thought it might have more of an impact, but it seems like
the market is very complacent about it," said David Bradley,
director of foreign exchange trading at Scotiabank.
    At 1:36 p.m. (1536 GMT) the Canadian dollar was at C$0.9865
versus the U.S. dollar, or $1.0137, stronger than Friday's North
American session close of C$0.9857, or $1.0145.
    Earlier in the day, it touched C$0.9843, or $1.0160,
matching the high of last week, which was also the strongest
level since May.
    Spitz said the move to that level saw more investors
stepping to sell the Canadian dollar, squaring short positions
against the U.S. currency.
    Canada's dollar was stronger against most other major
currencies on Tuesday and touched a three-month high against the
Australian dollar, even though the Australian currency got a
boost after the Reserve Bank of Australia gave no indication it
would cut interest rates soon. 
    Overall, trading ranges remained tight and volatility for
the currency was low. Analysts noted Canada's dollar will take
its cue from key events every day for the remainder of the week.
    The European Central Bank is expected to unveil steps on
Thursday to deal with the region's debt crisis, including a
bond-buying scheme to help lower Spanish and Italian borrowing
    "There are expectations -- big expectations -- in terms of
what (ECB President Mario) Draghi will deliver. He appears to
have telegraphed at least some of it with respect to bond
buying," said Spitz. "Anything that falls short will be traded
    Canadian government bonds were firmer across the curve, with
the 2-year bond up 2.5 Canadian cents to yield 1.138
percent. The benchmark 10-year bond price rose 13
Canadian cents, to yield 1.762.