CANADA FX DEBT-C$ lower, but rise in inflation rate stems decline

* Canadian dollar at C$1.1150 or 89.69 U.S. cents
    * Bond prices lower across the maturity curve

    By Leah Schnurr
    TORONTO, Feb 21 (Reuters) - The Canadian dollar touched a
three-week low against the greenback on Friday, extending its
recent sell-off even as a stronger-than-expected increase in the
domestic inflation rate helped the currency cut some declines.
    The closely watched report showed the annual inflation rate
unexpectedly jumped to 1.5 percent last month. Analysts said the
report reduced the likelihood of an interest rate cut by the
Bank of Canada, which has flagged its concerns about a weak
inflation environment. 
    Overnight index swaps, which trade based on expectations for
the central bank's policy rate, showed traders pared back their
already small bets on a rate cut in 2014 after the inflation
report was released.  
    Still, the report was not enough to completely reverse the
Canadian dollar's weaker direction, as investors also took in 
separate data that showed retail sales slumped in December.
    The loonie was down for the third session in a row, giving
back gains the currency had made in February so far. Analysts
said a variety of factors were pressuring the Canadian dollar on
Friday, including strength in the U.S. dollar as well as some
soft economic data seen this week. 
    "The main reason why the Canadian dollar is weak is not
really about just the Bank of Canada, but rather what is
happening globally," said Benjamin Tal, senior economist at CIBC
World Markets in Toronto.
    "We got some soft numbers lately from the U.S. and China and
that's something that always have a negative impact on the
Canadian dollar."
    The Canadian dollar was at C$1.1150 to the
greenback, or 89.69 U.S. cents, weaker than Thursday's close of
C$1.1099, or 90.10 U.S. cents. The currency earlier touched a
session low of C$1.1196, putting it within reach of a 4-1/2-year
    Recent U.S. economic data has been mixed, though analysts
have pointed to the harsh winter weather as the culprit for the
softness in some indicators. Other data earlier in the week
showed a continuing contraction in China's manufacturing sector,
while Canada's wholesale trade numbers disappointed.
    "Today we're in the context of a broadly stronger U.S.
dollar and then we've had Canada dollar positive data from CPI,
so we could still see that the Canadian dollar doesn't
strengthen as much as it would on a day where we were in an
environment of broad U.S. dollar weakness," said Camilla Sutton,
chief currency strategist at Scotiabank in Toronto.
    Canadian government bond prices were lower across the
maturity curve, with the two-year down 2-1/2 Canadian
cents to yield 1.017 percent and the benchmark 10-year
 down 11.7 Canadian cents to yield 2.452 percent.