CANADA FX DEBT-C$ ends near 2-month low on weak inflation data

* C$ ends at C$1.0291 vs US$, or 97.17 U.S. cents
    * Weak Canadian inflation means no rate hike on horizon
    * US$ strengthens near 10-mth high on Fed QE debate
    * Bond prices mixed

    By Andrea Hopkins
    TORONTO, May 17 (Reuters) - The Canadian dollar closed
weaker against its U.S. counterpart on Friday after touching its
softest level in more than two months on inflation data that was
both far below expectations and well off the Bank of Canada's
target range.
    Annual inflation fell in April to 0.4 percent from 1.0
percent in March, its lowest level since the 0.1 percent hit in
October 2009 and far below the central bank's target range of 1
to 3 percent. Analysts had expected no change from March to
    The data pushed the Canadian dollar to a session
low C$1.0313, or 96.96 U.S. cents, its weakest point since March
8 and well below Thursday's North American session close at
C$1.0192, or 98.12 U.S. cents.
    It recovered some ground later to finish the day at C$1.0291
versus the U.S. dollar, or 97.17 U.S. cents, ending a two-month
rally that had taken the currency close to parity, as high as
C$1.0014, or 99.86 U.S. cents, a week ago.
    "When we get key data we often revert back to pre-data
levels, which is basically what we did," said David Bradley,
director of foreign exchange trading at Scotiabank.
    "Now as we get close to the end of the day, we're grinding
back up towards the C$1.03 level, and I think over the next
couple of weeks we're going to see more weakness in
dollar-Canada, probably a test of the C$1.04 level," he said.
    Bradley said the U.S. dollar is gaining broad strength and
commodity-linked currencies weakening. The dollar soared on
against major currencies on growing speculation that the Federal
Reserve could soon begin to rein in its asset-buying program and
after data showed U.S. consumer sentiment hit an almost six-year
high in early May. 
    The Canadian inflation data reinforced expectations that the
Bank of Canada will not be raising interest rates any time soon.
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the
announcement, traders cut their expectations of an interest rate
hike later this year. 
    "The currency was vulnerable already, heading into these
numbers. It was clearly on its back foot in any event, and to
have a lower-than-expected reading on CPI right across the
board, it just knocked whatever support there was for the
currency out from under it," said Doug Porter, chief economist
at BMO Capital Markets.
    "This is outside of its recent range. (The future direction)
probably depends more on the broader U.S. dollar story, but at
least for a spell we could be probing some new lows for the
    The price of Canadian government debt were mixed, with gains
on the short end. The 2-year bond was down 0.1
Canadian cent to yield 1.010 percent, while the benchmark
10-year bond fell 37 Canadian cents to yield 1.927