* C$ recovers to 94.42 U.S. cents
* Bond fall, risk sentiment up on strong overseas data
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 currencywas 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 bondfell 6 Canadian cents to yield 1.242 percent, while the 10-year bond 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 )
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