* C$ finishes at 96.74 U.S. cents
* Bond prices drift lower
* Canadian data suggests sputtering start to Q3 growth
* Next up: August jobs report, Carney speaks in Alberta (Updates to close)
By Ka Yan Ng
TORONTO, Sept 9 (Reuters) - The Canadian dollar rose for a second day against its U.S. counterpart on Thursday, shrugging off soft Canadian economic data and getting support from the Bank of Canada's outlook and a broad return of risk appetite through several markets.
The currency hit its strongest level in three weeks, extending gains after the Bank of Canada raised interest rates for a third straight time on Wednesday and sounded surprisingly hawkish in its outlook. Canadian bond prices continued to sell off.
Canada had a record high monthly trade deficit in July and the housing market stalled, data released on Thursday showed, signaling sputtering economic growth as the third quarter got under way. [ID:nN09180600]
But the market took the data in stride, possibly because Thursday's figures were sandwiched between the Bank of Canada's policy announcement and Friday's Canadain jobs numbers for August, which are more immediately important in determining the central bank's monetary-policy path, said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"Today's continuation of the rally has more to do with risk appetite than any Canadian specific story," he said. "It was a hefty trade deficit, but the market decided to ignore it. Drilling into details, it wasn't as bad."
Canada's trade deficit, at C$2.74 billion, was much higher than expected in July as exports to the United States sank because of anemic demand, and imports surged to their highest level since November 2008, Statistics Canada data showed.
The two-year Canada bond CA2YT=RR dropped 9 Canadian cents to yield 1.462 percent, while the 10-year bond CA10YT=RR shed 40 Canadian cents to yield 3.090 percent. Government bonds outperformed U.S. Treasuries across most of the curve, except in the two-year maturity.
The Canadian dollar CAD=D4 finished at C$1.0337 to the U.S. dollar, or 96.74 U.S. cents, up from Wednesday's finish at C$1.0374 to the U.S. dollar, or 96.40 U.S. cents.
Earlier, the currency hit C$1.0301 to the U.S. dollar, or 97.08 U.S. cents, its highest level since Aug. 19.
"This is follow-through on what's perceived to be the Bank of Canada leaving the door slightly ajar to more (interest-rate) hikes," said Firas Askari, head of foreign exchange trading at BMO Capital Markets.
The central bank nudged its overnight rate target up by 25 basis points to 1 percent on Wednesday and, contrary to most economists' expectations, did not signal a subsequent pause in rate hikes. It said rates remained "exceptionally stimulative" but it kept all options open due to doubts about the U.S. and global recoveries. [ID:nN08241537]
Friday has several high-profile events. Bank of Canada Governor Mark Carney will be participating in the Spruce Meadows Changing Fortunes Round Table in Alberta. His comments will follow Canada's August figures for employment. They are expected to show the economy added 30,000 jobs in the month, while the unemployment rate may remain steady at 8 percent. [ID:nN03113893]
In other debt news, the Province of Ontario sold C$600 million in a reopening of an existing issue, according to a term sheet seen by Reuters on Thursday. [ID:nN09183243] (Additional reporting by Claire Sibonney; editing by Peter Galloway)