CANADA FX DEBT-C$ strengthens after surprise rise in factory sales

    * Canadian dollar at C$1.2497, or 80.02 U.S. cents
    * Canada's factory sales rise 1.6 percent in August
    * U.S. crude        prices climb 0.69 percent to $52.24 a
    * Bond prices lower across steeper yield curve

    By Fergal Smith
    TORONTO, Oct 18 (Reuters) - The Canadian dollar edged higher
against its U.S. counterpart on Wednesday, boosted by higher oil
prices and data showing a surprise rise in domestic
manufacturing sales.
    Canadian factory sales grew by 1.6 percent in August from
July as sales increased in motor vehicles, and petroleum and
coal, Statistics Canada said. Analysts had forecast a decrease
of 0.1 percent.             
    "Today's figures are modestly positive for the Canadian
dollar and negative for the front-end of the bond curve," Nick
Exarhos, an economist at CIBC Capital Markets, said in a
research note. "An October move from the Bank of Canada is still
a long-shot."
    Chances of a hike at next week's interest rate decision have
fallen to 22 percent from nearly 50 percent in mid-September,
the overnight index swaps market indicates.           
    Prices of oil, one of Canada's major exports, rose as weekly
U.S. crude inventories were expected to have fallen steeply and
geopolitical tensions around oil-rich Iraq and Iran raised risk
    U.S. crude        prices were up 0.69 percent at $52.24 a
    At 9:04 a.m. ET (1304 GMT), the Canadian dollar          was
trading at C$1.2497 to the greenback, or 80.02 U.S. cents, up
0.2 percent.
    The currency, which has recovered from an 11-day low on
Tuesday at C$1.2591, traded in a range of C$1.2487 to C$1.2534.
    Gains for the loonie have come after news on Tuesday that
talks on renegotiation of the North American Free Trade
Agreement would be extended through the first quarter of next
    Still, greater trade policy uncertainty and tighter mortgage
underwriting rules "risk slowing future rate hikes by the Bank
of Canada," said Sal Guatieri, senior economist at BMO Capital
Markets in a research note.
    On Tuesday, Canada's banking regulator finalized tougher new
rules on mortgage lending aimed at safeguarding lenders and
    Canadian government bonds were lower across a steeper yield
curve in sympathy with U.S. Treasuries as global equity markets
    The two-year            fell 2.5 Canadian cents to yield
1.524 percent and the 10-year             declined 19 Canadian
cents to yield 2.039 percent.
    Canada's inflation report for September and retail sales
data for August are due on Friday.

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli)