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CANADA FX DEBT-C$ strengthens after surprise rise in factory sales

* Canadian dollar at C$1.2497, or 80.02 U.S. cents

* Canada's factory sales rise 1.6 percent in August

* U.S. crude prices climb 0.69 percent to $52.24 a barrel

* Bond prices lower across steeper yield curve

TORONTO, Oct 18 (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Wednesday, boosted by higher oil prices and data showing a surprise rise in domestic manufacturing sales. Canadian factory sales grew by 1.6 percent in August from July as sales increased in motor vehicles, and petroleum and coal, Statistics Canada said. Analysts had forecast a decrease of 0.1 percent. "Today's figures are modestly positive for the Canadian dollar and negative for the front-end of the bond curve," Nick Exarhos, an economist at CIBC Capital Markets, said in a research note. "An October move from the Bank of Canada is still a long-shot." Chances of a hike at next week's interest rate decision have fallen to 22 percent from nearly 50 percent in mid-September, the overnight index swaps market indicates. Prices of oil, one of Canada's major exports, rose as weekly U.S. crude inventories were expected to have fallen steeply and geopolitical tensions around oil-rich Iraq and Iran raised risk premiums.

U.S. crude prices were up 0.69 percent at $52.24 a

barrel.

At 9:04 a.m. ET (1304 GMT), the Canadian dollar was

trading at C$1.2497 to the greenback, or 80.02 U.S. cents, up 0.2 percent. The currency, which has recovered from an 11-day low on Tuesday at C$1.2591, traded in a range of C$1.2487 to C$1.2534. Gains for the loonie have come after news on Tuesday that talks on renegotiation of the North American Free Trade Agreement would be extended through the first quarter of next year. Still, greater trade policy uncertainty and tighter mortgage underwriting rules "risk slowing future rate hikes by the Bank of Canada," said Sal Guatieri, senior economist at BMO Capital Markets in a research note. On Tuesday, Canada's banking regulator finalized tougher new rules on mortgage lending aimed at safeguarding lenders and borrowers. Canadian government bonds were lower across a steeper yield curve in sympathy with U.S. Treasuries as global equity markets climbed.

The two-year fell 2.5 Canadian cents to yield 1.524 percent and the 10-year declined 19 Canadian

cents to yield 2.039 percent. Canada's inflation report for September and retail sales data for August are due on Friday.

(Reporting by Fergal Smith; Editing by Meredith Mazzilli)