* C$ rises nearly one U.S. cent
* Analysts still see downward pressure, eyes C$1.30 level
* Bonds weaken broadly with equity rally
By Ka Yan Ng
TORONTO, March 4 (Reuters) - The Canadian dollar climbed against the U.S. currency on Wednesday as risk appetite returned and oil prices rose, spurred by a solid rally in global equity markets.
The currency weakened overnight to as low as C$1.2968 to the U.S. dollar, or 77.11 U.S. cents, but gradually recovered on the prospect of more stimulus spending by China and firmer oil prices.
A senior Chinese economic planning official said China would increase spending in areas such as manufacturing and infrastructure, on top of the 4 trillion yuan ($585 billion) stimulus package unveiled in November. [ID:nBJC000263]
The gains accelerated into the North American session, hitting C$1.2712 to the U.S. dollar, or 78.67 U.S. cents, as stock markets rallied and key indexes ended more than 2 percent higher, including the Toronto Stock Exchange.
The Canadian dollar has been heavily influenced by movements on stock markets recently, a barometer of risk sentiment.
The Canadian dollar <CAD=> finished at C$1.2754 to the U.S. dollar, or 78.41 U.S. cents, up from C$1.2911 to the U.S. dollar, or 77.45 U.S. cents, at Tuesday's close.
"We're seeing a decrease in risk aversion and that has sent the dollar broadly lower against most of the major currencies. Dollar/Canada has been no exception," said George Davis, chief FX technical analyst at RBC Capital Markets.
"It's relevant in the context that over the last few days we've been trying to break above the C$1.30 area and we've been running into a lot of resistance near there."
Although the Canadian dollar strengthened on Wednesday, there are still risks that could quickly pull it through the C$1.30 level in the short term, analysts said.
A drop through the level of C$1.30 to the U.S. dollar has not come about so far, but several moves in that direction have been made this week. Analysts said a significant break through this level could set up the Canadian dollar to hit lows not seen since 2004.
The currency had hit a three-month low on Tuesday after the Bank of Canada cut interest rates to a record low. Central banks are still in focus with the European Central Bank and the Bank of England both expected to cut rates on Thursday.
Another risk for currencies this week includes the U.S. employment data on Friday, which is expected to show the economy lost 648,000 jobs in February and the unemployment rate rose to 7.9 percent from 7.6 percent.
Market players got a sense of the jobs picture in the U.S. private sector after ADP Employer Services said job losses accelerated in February and were worse than economists' expectations. [ID:nN04472262]
"We'd have to see some sustainable bids to equities over the course of days or even weeks before dollar/Canada ceases to make any attempt at C$1.30. It's still a magnet," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"We may take another run at it, but it really will all depend on equities, the data, and events that we have coming up."
Canadian bond prices mirrored the U.S. counterparts, sliding across the curve as world stocks bounced back from multi-year lows.
But Canadian bonds outperformed U.S. Treasuries across the curve. The Canadian 30-year bond yield, which was 2.3 basis points higher than it U.S. counterpart on Tuesday, ended on par with U.S. curve.
"Canada's bond market has considerably outperformed the Treasury market reflecting our better fiscal fundamentals," said Sal Guatieri, senior economist at BMO Capital Markets.
"Investors are concerned about the ballooning U.S. budget deficit and exploding supply of Treasuries so they're selling."
In the U.S., Treasury prices dropped partly because of angst about some $2 trillion in debt issuance.[ID:nnN04538771]
The interest-rate sensitive two-year bond eased 1 Canadian cent to C$103.06 to yield 0.975 percent. The 10-year bond dropped 34 Canadian cents to C$106.39 to yield 3.019 percent.
The 30-year bond lost 85 Canadian cents to trade at C$123.20 and yield 3.673 percent. (With additional reporting by Jennifer Kwan; Editing by Jeffrey Hodgson)