CANADA FX DEBT-C$ touches 2-mth high as commodity prices rise

* C$ ends stronger, at C$0.9543 to the US$, or $1.0479

* Reached a high of C$0.9520, strongest since May 11

* Gains after European bank “stress test” results

* Rising oil, commodity prices support

By Trish Nixon

TORONTO, July 15 (Reuters) - Canada’s dollar hit a two-month high against the U.S. currency on Friday, as commodity prices rose and results of European bank stress tests eased some worries about the region’s financial system.

Only eight of the 90 European banks surveyed by the European Banking Authority failed the stress tests, well below market expectations that as many as 15 lenders would need more capital to withstand a prolonged recession. [nL6E7IF19G]

“The European stress test results somewhat allayed fears about Europe’s credit crisis,” said Sal Guatieri, senior economist with BMO Capital Markets.

“Investors appear to be running with it and they’re buying so-called riskier assets.”

The price of oil, a major Canadian export which often influences the currency, rose on lower supplies for a Canadian export pipeline and Wall Street’s advance in reaction to the stress tests. [O/R]

The Canadian dollar was stronger against most major currencies on Friday, also helped by the country’s relatively healthy fiscal position compared to the United States and Europe.

“We should look to the crosses as being the bigger driver of (Canadian dollar) strength and US dollar movement,” said Shaun Osborne, chief currency strategist at TD Securities.

“We’ve seen some pretty decent moves against the Australian dollar and against the euro, which triggered some stop loss buying of Canadian dollars.”

The Canadian dollar ended the session at C$0.9543 to the U.S. dollar, or $1.0479, up from Wednesday’s North American finish of C$0.9610, or $1.0406.

Earlier it rose as high as C$0.9520 to the U.S. dollar, or $1.0504, the strongest level since May 11.

The Canadian dollar made gains despite negative North American economic data.

U.S. reports showed consumer confidence hit a near 2-1/2 year low in early July and manufacturing output stalled in June, further frustrating expectations of a quick economic growth rebound in the second half of the year. [ID:nN1E76E0DF]

Canadian manufacturing sales fell by 0.8 percent in May from April, a drop that was significantly worse than expected as the auto industry failed to bounce back quickly from parts shortages resulting from the earthquake and tsunami that hit Japan in March. [ID:nN1E76E0OK]

For next week, traders will be looking ahead to an interest rate statement from the Bank of Canada next Tuesday. [ID:nN25118365]

According to a Reuters poll of Canada’s primary securities dealers, the Bank is unanimously expected to leave its overnight target rate unchanged on at 1 percent, where it has been since last September. [CA/POLL]

Yields on overnight index swaps, which trade based on expectations for the key central bank rate, showed investors expect no change on Tuesday and see little chance of rate increases in the remainder of the year. BOCWATCH

Canadian government bond prices were higher across the curve, as the negative economic data spurred some investors to seek safe-haven assets.

The two-year bond CA2YT=RR rose 10 Canadian cents to yield 1.417 percent. The 10-year bond CA10YT=RR was up 68 Canadian cents to yield 2.871 percent.

Canadian bonds outperformed U.S. Treasuries, with the Canadian 10-year yield 3.7 basis points below its U.S. counterpart. The yields on the two bonds were the same on Thursday. (Editing by Jeffrey Hodgson)