CANADA FX DEBT-C$ falls on fears of lacklustre U.S. recovery

* C$ closes at C$0.9607 to the U.S. dollar, or $1.0409

* Soft U.S. employment data drives currency lower

* Weaker commodity prices also weigh

* Bond prices higher across the curve

By Trish Nixon

TORONTO, , July 8 (Reuters) - Canada’s dollar weakened against the greenback on Friday after a dismal report on the U.S. labor market raised concerns that a U.S. economic recovery is further away than anticipated.

Stock markets around the world fell and oil slumped after U.S. data showed employment growth had ground to a halt in June. [MKTS/GLOB]

“That big shock coming out of the U.S. payrolls, certainly had a bigger impact on the Canadian dollar than the Canadian jobs numbers did,” said David Watt, senior currency strategist at RBC Capital Markets.

“The payrolls number probably had a more jarring impact on the Canadian dollar than any other currency pair.”

Canadian employment data, released ahead of the American report showed a bigger-than-expected job gains of 28,400 in June. [ID:nN1E767019]

The Canadian dollar had strengthened after the domestic release, but it immediately dropped to a session low, falling as far as C$0.9665 to the U.S. dollar, or $1.035, following the U.S. report.

The currency CAD=D4 finished the day at C$0.9607 to the U.S. dollar, or $1.0409, down from Thursday's finish at C$0.9587.

The U.S. economy actually created fewer jobs than its Canadian counterpart in June despite being many times its size.

“If we don’t get some fairly good news that the U.S. economy is starting to get its legs under it in the second half, its going to be a very challenging backdrop,” said Watt.

The uncertain external environment, combined with the absence of domestic wage pressures, could be more meaningful to the Bank of Canada than employment gains when it plots the path for interest rates, analysts said.

The central bank could opt to postpone rate hikes in the belief the economy can continue to expand without prices getting out of hand. Higher interest rates tend to help currencies by attracting international capital flows.

Yields on overnight index swaps, which trade based on expectations for the central bank policy rate, continued to reflect almost zero chance of a rate move on July 19.

Rate hike expectations for September, October and December briefly rose after the Canadian data but fell again after the U.S. release. BOCWATCH

Commodity prices also fell on the disappointing data, weighing on Canada’s natural resource-linked currency. U.S. crude oil fell 2.5 percent, the biggest percentage loss in two weeks. [O/R]

Canadian bond prices were higher across the curve, as investors moved back toward safe-haven assets.

The Canadian government two-year bond CA2YT=RR was up 13.5 Canadian cents to yield 1.511 percent, while the 10-year bond CA10YT=RR rose 79 Canadian cents to yield 2.965 percent.

Canadian bonds mostly underperformed U.S. Treasuries, with the Canadian 10-year yield 6 basis points below its U.S. counterpart, compared with 8.4 basis points lower yesterday. (Editing by Jeffrey Hodgson)