By Frank Pingue
TORONTO, Jan 4 (Reuters) - The Canadian dollar rose against the greenback on Friday morning due largely to a slide in the U.S. currency after a surprisingly weak U.S. payrolls report, while commodity prices added support.
Bond prices, which have been lacking direction lately given thin market conditions, took their cue from the bigger U.S. treasury market and rose across the curve.
At 9:10 a.m. (1410 GMT), the Canadian dollar was at US$1.0125, valuing a U.S. dollar at 98.76 Canadian cents, up from US$1.0092, or 99.09 Canadian cents, at Thursday's close.
The Canadian dollar had rallied briefly to US$1.0161 during the overnight session but then turned lower heading into the North American session.
But the weak U.S. data opened the door for further Canadian dollar gains and lifted the domestic currency to US$1.0151 from about US$1.0104 just ahead of the data.
"In the wake of that softer-than-expected (U.S.) report we've seen the Canadian dollar turn markedly higher," said Doug Porter, deputy chief economist at BMO Capital Markets.
The rise in the Canadian dollar extended a rally over the past two weeks, which has been fueled mainly by higher commodity prices that saw both gold and oil hit record highs this week.
Canada is a major producer and exporter of both oil and gold, and its currency often rises as the prices for the two commodities go up.
On Friday, the first batch of Canada data released in 2008 showed higher-than-expected figures on producer prices and raw materials.
The market will also keep an eye on the Ivey Purchasing Managers Index for December due out at 10:00 a.m., which could weigh on the Canadian dollar as it is expected to come in lower than the prior month.
Porter suggested the Canadian dollar will hang on to the bulk of its early gains as the latest U.S. data will start talk about the potential of a 50-basis-point rate cut by the U.S. Federal Reserve later this month.
"There's going to be lots of chatter about a possible 50 basis point move by the Fed," Porter said. "If not a 50 basis point move then I think this does heighten the chance of additional easing beyond January."
Canadian bond prices were sent higher as the latest U.S. data added to nagging concern about the U.S. economy, kept focus on a Fed rate cut and upped investor appetite for more secure assets such as government debt.
"We've seen (U.S.) treasuries take off and they are likely to take Canada with them," said Porter.
Canadian data showed producer prices rose in November after six straight monthly declines, while prices for raw materials also topped estimates.
The overnight Canadian Libor rate LIBOR01 was at 4.2183 percent, up from 4.2016 percent on Thursday.
Friday's CORRA rate CORRA= was at 4.2562 percent, up from 4.2211 percent on Thursday. The Bank of Canada publishes the previous day's rate at around 9 a.m. (1400 GMT) daily.
The two-year bond rose 6 Canadian cents to C$101.22 to yield 3.576 percent. The 10-year bond was up 26 Canadian cents at C$100.83 to yield 3.894 percent.
The yield spread between the two-year and 10-year bond was 31.8 basis points, up from 31.4 basis points at the previous close.
The 30-year bond rose 28 Canadian cents to C$116.19 to yield 4.052 percent. In the United States, the 30-year treasury yielded 4.354 percent.
The three-month when-issued T-bill yielded 3.79 percent, down from 3.81 at the previous close.