* Canadian dollar closes at parity with U.S. dollar
* Oil provides background for currency's strength
* Bonds higher across the curve in thin trading
By John McCrank
TORONTO, May 15 (Reuters) - The Canadian dollar closed at parity against the U.S. dollar on Thursday as robust energy prices helped it recover from early losses after the release of weak manufacturing sales data.
Domestic bond prices rose across the curve as the weak domestic data highlighted the impact the U.S. economic downturn is having on Canada.
The Canadian currency closed at C$1.0000 to the U.S. dollar, up from C$1.0043 to the U.S. dollar, or 99.57 U.S. cents, at Wednesday's close.
It was the currency's highest close since March 18.
"It really does seem like the environment in the background is improving for the Canadian dollar in the short term and that's partly to do with energy prices... but also developments in other economies," said David Watt, senior currency strategist at RBC Capital Markets.
The price of U.S. crude oil CLc1, while off its record high of nearly $127 a barrel hit earlier this week, remains lofty. Canada is a major oil exporter and its currency is often influenced by the commodity.
The Canadian dollar was also up against the crosses, such as the currencies of New Zealand, the Britain, and the euro-zone.
Watt said that was due to weaker growth outlooks and the potential for interest rate cuts in those places. Meanwhile, in the U.S., Canada biggest trading partner, growth is holding up better than many people expected.
So while the Canadian and U.S. central banks have both made deep cuts to their interest rates, they may be ahead of the curve compared to other major economies.
The Bank of Canada is expected to make at least one more 25 basis point cut in its key overnight rate to 2.75 percent at its next fixed announcement data on June 10.
Domestic data helped bolster that view, as Canadian manufacturing sales fell 1.6 percent in March after two months of gains, hurt by an ongoing slump in the auto industry. Analysts were looking for a 0.2 percent rise.
Canadian bond prices rose across the curve helped by the weaker-than-expected manufacturing data, and light trade ahead of the upcoming Victoria Day long weekend.
"Basically, traders just spent today squaring up their positions since there is an early bond close tomorrow," said Sheldon Dong, fixed income strategist at TD Waterhouse Private Investment in Toronto.
Canada has no more data due this week but a slew of reports are slated for release next week, including April inflation data on Wednesday and March retail sales figures the following day.
The two-year bond rose 9 Canadian cents to C$101.92 to yield 2.772 percent. The 10-year rose 32 Canadian cents to C$103.37 to yield 3.560 percent.
The yield spread between the two- and 10-year bonds was 78.6 basis points, up from 77.7 at the previous close.
The 30-year bond climbed 37 Canadian cents to C$116.32 for a yield of 4.040 percent. In the United States, the 30-year Treasury yielded 4.552 percent.
The three-month when-issued T-bill yielded 2.63 percent, down from 2.68 percent at the previous close. (Editing by Renato Andrade)