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* Canadian dollar at C$1.2466, or 80.22 U.S. cents
* Canada's factory sales rise 1.6 percent in August
* Bond prices lower across steeper yield curve
* Canada's 2-year yield drops further below its U.S. equivalent
By Fergal Smith
TORONTO, Oct 18 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday, helped by firmer oil prices and data showing a surprise rise in domestic manufacturing sales.
Canadian manufacturing sales grew by 1.6 percent in August, the biggest gain in eight months, on higher sales of vehicles and parts, as well as petroleum and coal products. Analysts had forecast a decrease of 0.1 percent. crude CLc1 prices settled 16 cents higher at $52.04 a barrel, although some gains were pared after U.S. refining and fuel stocks data signaled slower demand in the world's top oil consumer. 5 p.m. EDT (2100 GMT), the Canadian dollar CAD=D4 was trading at C$1.2466 to the greenback, or 80.22 U.S. cents, up 0.4 percent.
It touched its strongest since Friday at C$1.2459. On Tuesday, it had found support ahead of its October low at C$1.2600.
"When I speak to our traders and sales people, there doesn't appear to be a lot of conviction on the part of the market place right now," said Scott Lampard, head of global markets at HSBC Bank Canada.
An uncertain outlook for the North American Free Trade Agreement and more unfavourable interest rate spreads between Canadian and U.S. debt had weighed on the loonie for more than a month. But that move has stalled ahead of the Bank of Canada interest rate decision next week.
Some investors are buying the loonie in case the central bank signals that monetary policy remains too accommodative, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
Canadian government bonds were lower across a steeper yield curve in sympathy with U.S. Treasuries as global equity markets climbed. The two-year CA2YT=RR dipped 0.5 Canadian cent to yield 1.514 percent and the 10-year CA10YT=RR declined 17 Canadian cents to yield 2.037 percent.
The gap between Canada's 2-year yield and its U.S. equivalent widened a further 1.5 basis points to a spread of -5.3 basis points.
Canada's inflation report for September and retail sales data for August are due on Friday.