CANADA FX DEBT-C$ sharply weaker on grim employment data

* C$ at C$1.0202, or 98.02 U.S. cents

* Canadian, U.S. jobs data far weaker than expected

* Markets may start to speculate on Bank of Canada easing

TORONTO, April 5 (Reuters) - The Canadian dollar weakened to a nearly two-week low against its U.S. counterpart on Friday after both U.S. and Canadian employment data came in far weaker than expected, erasing a short-lived rally by the currency to 6-week highs.

The Canadian currency fell to C$1.0220 to the U.S. dollar, or 97.85 U.S. cents, after data showed Canada unexpectedly lost jobs in March and U.S. employers added far fewer jobs than expected, raising fears that the North American economic recovery was not as robust as previously thought.

Canada’s economy shed 54,500 jobs in March, more than wiping out the previous month’s big gain and pushing up the jobless rate to 7.2 percent from 7.0 percent, Statistics Canada data indicated on Friday. Market analysts had forecast an increase of 8,500 jobs.

The U.S. job market was little better. U.S. employers added just 88,000 positions last month, the slowest pace in nine months, well below the 200,000 gain expected by analysts polled by Reuters. The data was seen as a sign that Washington’s austerity drive could be stealing momentum from the economy.

Canadian trade data also disappointed. Lower exports and slightly higher imports pushed Canada’s trade deficit in February up to C$1.02 billion ($1.01 billion) from a revised shortfall of C$746 million in January.

“It was a pretty sorry lot of data right across the board, not just the employment number but the trade numbers were a disappointment as well. Compounding that was the weakness that we saw in the U.S.,” said Doug Porter, chief economist at BMO Capital Markets.

“I found it very strange the dollar had been as strong as it was heading into these numbers, and it has clearly taken a step back in wake of this ugly set of figures from both Canada and the U.S.”

At 9:06 a.m. (1306 GMT) the Canadian dollar was at C$1.0202 to the U.S. dollar, or 98.02 U.S. cents, nearly a cent weaker than Thursday’s North American session close at C$1.0123 to the U.S. dollar, or 98.78 U.S. cents.

The Canadian currency had notched 6-week highs near C$1.01 on Thursday as the yen weakened on Bank of Japan stimulus news and the euro surged higher amid comments by European Central Bank head Mario Draghi.

While BMO’s Porter said the weakness in Canada’s economy would not be enough to push the Bank of Canada into easing monetary policy, markets would start talking about the possibility. Even a long-shot possibility of lower interest rates could drive investors away from the Canadian currency.

Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that after the data traders increased their small bets on a rate cut in late 2013.

Still, the weak jobs numbers in the United States should limit the downside to the Canadian dollar, said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“The U.S. number could trump the Canadian numbers in the FX space, as their employment numbers also came in much weaker than expected ... so concern about the U.S. recovery could limit the weakness in the Canadian dollar,” Ferley said.

The price of Canadian government debt was higher across the curve as investors fled to safety. The two-year bond was up 7 Canadian cent to yield 0.958 percent while the benchmark 10-year bond rose 68 Canadian cents to yield 1.721 percent.