Yep, you guys are right - its to do with cotton mills & covers all bedding - that's why dept stores have 'Manchester Dept' & why shops have 'Manchester' sales regardless of what brands they sell.
Taken from Wordweb: "Noun: manchester
Usage: Austral, NZ (=household linen)
Drygoods for household use that are typically made of white cloth
- white goods, household linen"
(website: http://www.wordwebonline.com/en/MANCHESTER)
Taken from Aussie slang dictionary by Dunway Enterprises "Manchester - Household linen such as sheets & pillow cases"
(website: http://www.dunway.com/html/aussie_slang.html)