* Canadian dollar rallies off key technical level
* Canadian factory sales slide more than expected
* Bond prices relinquish gains made early this week
By Frank Pingue
TORONTO, Oct 16 (Reuters) - The Canadian dollar rose versus the U.S. dollar on Thursday, but only after sharp slides pegged to lower oil prices and global economic concerns were countered with waves of buying when it neared key technical levels.
Domestic bond prices closed mostly lower as a late rally in equities ate away at gains struck after Canadian data amplified a chorus of voices calling for Canada to dip into a recession.
The Canadian dollar closed at C$1.1816 to the U.S. dollar, or 84.63 U.S. cents, up from C$1.1879 to the U.S. dollar, or 84.18 U.S. cents, at Wednesday's close.
While up modestly from its previous close, the Canadian currency spent the session in a wide range, falling as low as C$1.1998 to the U.S. dollar, or 83.35 U.S. cents, and rising up to C$1.1811 to the U.S. dollar, or 84.67 U.S. cents.
All signs pointed to a much weaker Canadian dollar as the price of oil, a key Canadian export, tumbled to a 13-month low, the Toronto Stock Exchange's main index closed lower, and the latest domestic data disappointed.
But after falling hard from gains recorded earlier in the week, the Canadian dollar repeatedly drew buying interest each time it neared a key technical level around C$1.120.
"The market is a little cautious about pushing it too much from these levels," Steve Butler, director of foreign exchange trading at Scotia Capital. "While there is still the likelihood that we will see it weaken in the short run, I think the markets are taking a bit of a pause today."
With no more Canadian economic data due out this week, the price of oil and the performance of global stock markets will likely dictate the domestic currency's direction.
But with concerns that the global economy is teetering on the verge of recession, which would ultimately crimp demand for a major Canadian export like oil, and persistent volatility on equity markets, the currency could be headed lower yet.
Traders may also hold off making major moves ahead of the Bank of Canada's rate announcement Oct. 21. A Reuters poll taken last week showed most Canada's primary dealers expect at least one more rate cut before the end of the year.
BOND PRICES SLIDE
Canadian bond prices were headed for a higher close across the curve until a late rally on the Toronto Stock Exchange's main index convinced dealers to unload more secure assets like government debt in favor of riskier assets like stocks.
The S&P/TSX composite index .GSPTSE, which at one point in the session was down 562 points, clawed back and managed to cut its losses for the session to 53 points.
The early gains in bond prices were aided by concerns that the global economy is headed into a recession and a domestic report that showed Canadian manufacturing sales plummeted 3.7 percent in August. Analysts had predicted a 1 percent drop.
"The pullback in shipments does suggest we are feeling the wrath of the American consumer strike," said Sal Guatieri, senior economist at BMO Capital Markets.
"Our general sense is now it will be difficult for Canada to avoid a recession given that we have penciled in a deeper recession for the U.S. in the second half of this year."
The two-year bond ended down 7 Canadian cents at C$100.93 to yield 2.297 percent. The 10-year bond rose 2 Canadian cents to C$104.02 to yield 3.747 percent.
The yield spread between the two-year and the 10-year bond moved to 120 basis points from 123 basis points at the previous close.
The 30-year bond dropped 35 Canadian cents at C$113.10 to yield 4.208 percent. In the United States, the 30-year Treasury yielded 4.259 percent.