* C$ closes at 99.67 U.S. cents
* Hits session low of 99.20 U.S. cents
* Both U.S., Canadian reports below forecasts
* Bank of Canada seen on hold well into 2011 (Updates to close, adds details, commentary)
By Claire Sibonney
TORONTO, Dec 3 (Reuters) - The Canadian dollar closed on a flat note on Friday after initially sagging on disappointing U.S. and domestic job data that undermined hopes of stronger economic growth in coming months.
U.S. nonfarm payrolls rose far less than expected in November -- up 39,000 versus forecasts of 140,000 -- and the jobless rate jumped to a seven-month high of 9.8 percent, dampening hopes for a self-sustaining economic recovery in Canada's biggest trading partner. [ID:nN02238002]
In the aftermath of the weak U.S. data, the Canadian currency CAD=D4 dropped as low as C$1.0081 against the U.S. dollar, or 99.20 U.S. cents.
The currency was already pulling back after Canadian employment data showed a mixed performance in November with tepid job gains of 15,200 versus expectations of 18,000. The unemployment rate fell to 7.6 percent from 7.9 percent, but that was largely due to young people dropping out of the job market. [ID:nN03271210]
"A weak Canadian jobs report and a weak U.S. jobs report is not painting the rosiest of pictures for the Canadian fundamental outlook," said Camilla Sutton, chief currency strategist at Scotia Capital.
The Canadian dollar CAD=D4 regained ground after its initial retreat and closed the North American session at C$1.0033 to the U.S. dollar, or 99.67 U.S. cents, little changed from Thursday's close at C$1.0039 to the U.S. dollar, or 99.61 U.S. cents. For the week, it was up 1.7 percent.
Overnight, the Canadian dollar was only two basis points shy of parity at C$1.0002, or 99.98 U.S. cents.
Sutton said speculation of large currency flows being generated by the C$3.3 billion deal by U.S.-based Walter Energy Inc WLT.N to buy Canada's Western Coal WTN.TO WTN.L was a factor behind the move toward parity and may help explain the Canadian dollar's standout performance on Thursday when it surged to a three-week high. [ID:nLDE6B20EU]
Looking ahead, next week's focus will be on the Bank of Canada's interest rate announcement on Tuesday. But with the jobs data doing little to change expectations it will almost certainly stay on hold at 1 percent.
"The Bank of Canada would care deeply about both figures and at this point neither argues shriekingly for a hike in the near term," said Eric Lascelles, chief Canadian macro strategist at TD Securities.
"I think we can sit comfortably and imagine that next week is a pause and for that matter that early 2011 probably brings more of the same."
On Sunday, the Federal Reserve will also be in the spotlight, as Chairman Ben Bernanke appears on the U.S. TV news program "60 Minutes." [ID:nN02276467]
Scotia's Sutton said comments by Bernanke to defend the Fed's controversial $600 billion U.S. Treasury bill purchase could spur some U.S. dollar weakness.
She noted that near term support for the U.S. dollar was a recent low of C$0.9980 and the year trough from April at C$0.9931.
Canadian government bonds erased earlier losses, up modestly alongside Treasuries on an unwind of short positions after the weak U.S. jobs report.[US/]
The two-year government of Canada bond CA2YT=RR was up 8 Canadian cents to yield 1.637 percent, while the 10-year bond CA10YT=RR gained 4 Canadian cents to yield 3.196 percent. (Editing by Rob Wilson)