* C$ closes at C$0.9868 vs US$ or $1.0134
* Strong Canadian trade data gave early boost
* C$ hit session high of C$0.9881 on Mubarak news
* Two- and 10-year bond prices lower (Updates with details and comments)
By Claire Sibonney and Solarina Ho
TORONTO, Feb 11 (Reuters) - The Canadian dollar rallied against the greenback on Friday, shrugging off a drop in oil prices after Egyptian President Hosni Mubarak stepped down and handed over power to the army.
The Canadian dollar and other risk-sensitive assets rose on news of Mubarak's departure as hopes rose that the Egyptian crisis has been defused. [MKTS/GLOB]
The currency broke through a series of U.S. dollar support levels and climbed as high as C$0.9863, or $1.0139, in the aftermath of Mubarak's resignation. It also outperformed against other currencies.
"Ultimately the market has managed to digest the news coming out of Egypt, and from a Canada perspective the Canadian dollar is trading even stronger, despite the downturn in crude pricing," said Jack Spitz, managing director of foreign exchange at National Bank Financial, noting that the normal correlation between the Canadian dollar and commodity prices has broken down recently.
Oil prices sank as the Egyptian news alleviated concerns about Mideast crude supplies. The Canadian dollar gave back some gains on the oil price drop, but only temporarily. [O/R]
Spitz said money has been flowing into the Canadian dollar as it is seen as a partner currency to the U.S. dollar, which also performed well on Friday.
"All things being equal, the inability of dollar/Canada to breach parity from a technical perspective has opened up a move down to test support through C$0.9915, through C$0.9900 and now through C$0.9870," he said. "So ultimately the proof will be whether or not this (Canadian) currency has legs to go through the calendar bottom of C$0.9832."
Before the Mubarak news, the Canadian dollar was already on better footing after data showed Canada's trade balance unexpectedly returned to surplus in December after nine months of deficits, fueling hopes of an export recovery. [ID:nN11157853]
"It does mean the economy is quite a bit stronger than we thought in the fourth quarter," said Shaun Osborne, chief currency strategist at TD Securities.
The currency CAD=D4 closed the North American session at C$0.9868 to the U.S. dollar, or $1.0134, up from Thursday's finish of C$0.9958 to the U.S. dollar, or $1.0042. It was up 0.2 percent on the week.
Osborne said the Canadian currency is trading in a tight band that he does not expect it to break out of soon. He sees resistance in the low C$0.9800 range and support just above U.S. dollar parity.
"The Canadian dollar is looking quite highly valued against the U.S. dollar as it is. What would drive us significantly beyond that point? I think you'd have to see a sharper widening out in short-term interest-rate spreads in the Canadian dollar's favor."
Canadian bond prices were mostly lower after the strong trade data, while U.S. Treasuries surged as the highest yields in nearly 10 months attracted buyers. [US/]
Treasuries, which are more liquid than Canadian government debt, were seen as benefiting more from some safe-haven flows amid continued uncertainty in the Mideast following Mubarak's resignation.
The two-year Canadian government bond CA2YT=RR was off 7 Canadian cents to yield 1.911 percent, while the 10-year bond CA10YT=RR fell 8 Canadian cents to yield 3.478 percent. (Editing by Peter Galloway)