CANADA FX DEBT-C$ rebounds with risk sentiment, bonds fall

* C$ recovers to 94.42 U.S. cents

* Bond fall, risk sentiment up on strong overseas data

By Ka Yan Ng

TORONTO, Sept 1 (Reuters) - Canada's dollar recovered some
lost ground against the U.S. currency on Wednesday, while bond
prices fell as risk appetite was revived on strong overseas
data, offsetting concerns about the world economic recovery.

China's manufacturing sector rebounded in August after
slowing for several months while Australia's economy grew at
the fastest pace in three years last quarter, some good news
for investors to hang on after a string of weak U.S. and
Canadian data recently. [ID:nTOE68001O] [ID:nSGE67U0L3]

This overnight data helped boost Asian and European equity
markets, and looked set to follow through in the North American
session.

The Canadian dollar starts the month a little firmer after
losing 3.6 percent in August. At 8:00 a.m. (1200 GMT), the
Canadian currency CAD=D4 was at C$1.0591 to the U.S. dollar,
or 94.42 U.S. cents, up from C$1.0665 to the U.S. dollar, or
93.76 U.S. cents, at Tuesday's close.

Canada's two-year bond CA2YT=RR fell 6 Canadian cents to
yield 1.242 percent, while the 10-year bond CA10YT=RR
dropped 45 Canadian cents to yield 2.828 percent.

"We got a big shift back into risk seeking today on the
back of China data and strong GDP out of Australia," said
Michael O'Neill, managing director at Knightsbridge Foreign
Exchange, a commercial foreign exchange dealing firm.

"But Canada seems to be underperforming."

No more domestic economic data is due this week, leaving
market players to consider how external data will influence the
Bank of Canada heading into next week's rate decision.

The next key indicator will be Friday's U.S. payrolls
report, given the Bank of Canada has suggested further interest
rate hikes would be weighed against both domestic and global
economic developments.

The key rate is one of the closest calls in some time with
market pricing, as measured by a Reuters calculation of yields
on overnight index swaps, roughly split between a quarter-point
rate hike or a no change in interest rates.

However, most of Canada's primary securities dealers,
surveyed by Reuters on Tuesday, still forecast the central bank
will raise its key rate by a quarter-point to 1.0 percent on
Sept. 8. But they also forecast the rate hike would be the last
of 2010 due to the slowing economy. [ID:nN31267387]

"They're on record as saying they want to normalize rates.
And at less than 1 percent, that isn't normal. I think they
will go...and after that we'll have a look," said O'Neill.

(Reporting by Ka Yan Ng; Editing by Chizu Nomiyama )