* C$ rises to 99.94 U.S. cents, hits parity briefly
* Gains made on low volumes
* Global stock gains boost risk appetite
* Bond prices erase early losses
By Ka Yan Ng
TORONTO, Dec 29 (Reuters) - The Canadian dollar pushed above parity with the U.S. dollar for a second day on Wednesday, testing the psychologically-key level in quiet trading.
The Canadian dollar hit a high of 99.75 Canadian cents to the U.S. dollar, matching the level it hit on Tuesday, its highest since late April. Canada's stock market was shut on Tuesday for an extended holiday break and most local currency and bond traders were also away.
The Canadian dollar hovered around parity for much of the session as a rise in global stock prices on expectations of stronger economic growth in 2011 lifted investors' appetite for higher-yielding currencies. [FRX/]
"You're starting to see there's a lot of interest around that very level," said David Tulk, senior macro strategist at TD Securities, referring to intraday corporate flows.
"I think you would see testing (of parity) going on for at least the next couple of days."
The Canadian dollar finished at C$1.0006 to the U.S. dollar, or 99.94 U.S. cents, up from Friday's close at C$1.0064 to the U.S. dollar, or 99.36 U.S. cents. Canadian markets were also shut on Monday.
"It's just a flow that probably would have gone through over the past couple of days that is now all going through the market, and you back that up with some illiquidity and we're getting a fairly substantial bounce," said David Watt, senior currency strategist at RBC Capital Markets.
The Canadian dollar has reached a one-for-one footing with the U.S. currency a handful of times this year, but never held at that level for long.
Monthly foreign exchange surveys by Reuters have consistently found forecasters expect the Canadian dollar to hover near par with the greenback next year, partly as a result of sturdy commodity prices. [CAD/POLL]
Forecasts of interest rate increases from the Bank of Canada next year are also supporting the currency, with a widening spread over U.S. interest rates seen attracting investors.
Canadian bond prices erased losses, helped by a strong U.S. seven-year note auction.
Tulk said there was some concern ahead of the auction that demand would be soft given holiday-thinned trade. But the auction spurred a rally in U.S. government debt, and, to a lesser degree, Canadian government bonds.
The two-year bond CA2YT=RR reversed early losses, rising 2 Canadian cents to yield 1.681 percent. The 10-year bond CA10YT=RR rose 2 Canadian cents to yield 3.166 percent. Canadian government bonds put in a mixed performance against their U.S. counterparts. (With additional reporting by John McCrank; editing by Jeffrey Hodgson)
