* C$ gets late-session boost from U.S. stimulus deal
* Rally erases early fall on surprise Canada trade deficit
* Shorter-dated bonds end lower as risk appetite returns (Recasts with comments and closing numbers)
By Frank Pingue
TORONTO, Feb 11 (Reuters) - Canada's dollar raced off its session low below 80 U.S. cents to close higher on Wednesday as a congressional deal on a U.S. economic stimulus package helped the market shrug off the announcement of a surprise Canadian trade deficit and left it more willing to take on risk.
The rally in the Canadian dollar came late in the day after the U.S. Congress reached a compromise on a $789 billion package of spending and tax cuts designed to revive the recession-hit U.S. economy. [ID:nN11379390]
That proved enough to allow the currency reclaim losses suffered when data showed Canada had a trade deficit of C$460 million in December versus expectations of a surplus. It was the country's first monthly trade deficit in almost 33 years. The figures followed a report last week that showed Canada suffered its worst monthly job losses in more than three decades in January. [ID:nN11]
"We've had quite a couple of really significantly poor data points over the course of the last few days and the Canadian dollar really hasn't looked liked it wants to sell off," said Shaun Osborne, chief currency strategist at TD Securities.
"I don't think we are necessarily reacting to fundamentals at the moment ... we are seeing more correlation with risk appetite and that seems to be the driver."
The Canadian dollar closed at C$1.2428 to the U.S. dollar, or 80.46 U.S. cents, up from Tuesday's close of C$1.2462 to the U.S. dollar, or 80.24 U.S. cents.
The close was 0.8 percent off the session low of C$1.2532 to the U.S. dollar, or 79.80 U.S. cents.
The trade figures highlighted how serious an impact the global crisis is having on Canada, which is a leading commodity producer that relies heavily on trade with the United States.
The currency could head lower again on Thursday as fundamental economic signals are still dark.
"It's a Canadian dollar-bearish story in an environment where global trade is still slowing down and the outlook for global growth is still uncertain," said David Watt, senior currency strategist at RBC Capital Markets. "It's just not a bullish environment for the Canadian dollar at all."
Canadian bonds ended mixed as prices at the short end of the curve dropped as the U.S. stimulus plan prompted a move back in riskier equities, while longer-dated bonds pared some of their earlier gains.
The weak Canadian economic data was not believed to have played a major role in the performance of bonds, which rallied sharply during the previous session and opened the door for dealers to pocket some of those gains.
"I put it down to a little profit-taking after yesterday's strong gains," said Sal Guatieri, senior economist at BMO Capital Markets. "I don't think the trade reports had much impact on the bond market ... the data is really a side show to the policy developments (in the U.S.)."
The interest-rate sensitive two-year bond fell 2 Canadian cents to C$102.81 to yield 1.165 percent, while the 10-year bond rose 25 Canadian cents to C$110.52 to yield 2.947 percent.
The 30-year bond rallied 65 Canadian cents to C$122.80 to yield 3.694 percent.
Canadian bonds moved largely in line with U.S. Treasuries across the curve. The Canadian 30-year bond yield was about 23.7 basis points above its U.S. counterpart, compared with 24.6 basis points on Tuesday. (Editing by Peter Galloway)