SQL XML query() using sql:variable not working

I am trying to write a scalar value function in SQL 2008 R2 that will take a chunk of XML and an XQuery path, and return the result as a string. Looking at just the T-SQL to perform the XML XQuery for the time being, the following example shows two statements (1 & 2). The first one should work apparently, but doesn't. The second is the same thing but without the use of sql:variable().

declare @xml xml
set @xml = '<?xml version="1.0" encoding="UTF-8"?>
<Response version="1.0">
    <Transaction>
        <Processing>
            <Return>Some text that I need to extract.</Return>
        </Processing>
    </Transaction>
</Response>'

declare @xquery varchar(100)
set @xquery='/Response/Transaction/Processing/Return'

-- Statement 1 : This should work, but it doesn't
select CAST(@xml.query('data(*[local-name(.) = sql:variable("@xquery")])') as varchar(max))

-- Statement 2 : This does work
select CAST(@xml.query('data(/Response/Transaction/Processing/Return)') as varchar(max))

Can anyone tell me why this is not working? What am I doing wrong, if indeed whether it is at all possible?

I have looked at numerous supposed working examples of this on this site, which is how I arrived at the above code, but I can't figure out why my implementation is not working.