CANADA FX DEBT-C$ gains, boosted by surprise rise in factory sales

 (Adds dealer quotes, details throughout; updates prices)
    * Canadian dollar at C$1.2466, or 80.22 U.S. cents
    * Canada's factory sales rise 1.6 percent in August
    * Bond prices lower across steeper yield curve
    * Canada's 2-year yield drops further below its U.S.

    By Fergal Smith
    TORONTO, Oct 18 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Wednesday, helped by firmer oil
prices and data showing a surprise rise in domestic
manufacturing sales.
    Canadian manufacturing sales grew by 1.6 percent in August,
the biggest gain in eight months, on higher sales of vehicles
and parts, as well as petroleum and coal products. Analysts had
forecast a decrease of 0.1 percent.             
    U.S. crude        prices settled 16 cents higher at $52.04 a
barrel, although some gains were pared after U.S. refining and
fuel stocks data signaled slower demand in the world's top oil
    At 5 p.m. EDT (2100 GMT), the Canadian dollar          was
trading at C$1.2466 to the greenback, or 80.22 U.S. cents, up
0.4 percent.
    It touched its strongest since Friday at C$1.2459. On
Tuesday, it had found support ahead of its October low at
    "When I speak to our traders and sales people, there doesn't
appear to be a lot of conviction on the part of the market place
right now," said Scott Lampard, head of global markets at HSBC
Bank Canada.
    An uncertain outlook for the North American Free Trade
Agreement and more unfavourable interest rate spreads between
Canadian and U.S. debt had weighed on the loonie for more than a
month. But that move has stalled ahead of the Bank of Canada
interest rate decision next week.
    Some investors are buying the loonie in case the central
bank signals that monetary policy remains too accommodative,
said Marc Chandler, global head of currency strategy at Brown
Brothers Harriman.
    Canadian government bonds were lower across a steeper yield
curve in sympathy with U.S. Treasuries as global equity markets
climbed. The two-year            dipped 0.5 Canadian cent to
yield 1.514 percent and the 10-year             declined 17
Canadian cents to yield 2.037 percent.
    The gap between Canada's 2-year yield and its U.S.
equivalent widened a further 1.5 basis points to a spread of
-5.3 basis points.     
    Canada's inflation report for September and retail sales
data for August are due on Friday.

 (Reporting by Fergal Smith; Editing by Lisa Shumaker)