CANADA FX DEBT-C$ hits 5-week low as data supports gradual rate hike approach

    * Canadian dollar near flat against the greenback
    * Loonie touches a five-week low at 1.3120
    * Canada's inflation rate falls in September to 2.2 percent
    * Canada-U.S. 10-year spread widens to most in nearly three

    By Fergal Smith
    TORONTO, Oct 19 (Reuters) - The Canadian dollar steadied
against the greenback on Friday, but held near a five-week low
hit after domestic data showing a slowdown in inflation was
supportive of the Bank of Canada maintaining a gradual approach
to interest rate hikes.
    The annual inflation rate in September dipped to 2.2 percent
from 2.8 percent as price pressures from gas and air travel
eased. Analysts had forecast an annual rate of 2.7 percent.
    The central bank's three core inflation measures all fell,
for the first time since November 2016.
    "This should really quell a lot of speculation that the Bank
of Canada will move away from the gradual path of tightening,"
said Andrew Kelvin, senior rates strategist at TD Securities.
    The central bank said in September that it had discussed
dropping its gradual approach to raising rates. A faster pace of
tightening could boost the loonie.
    Money markets still expect the Bank of Canada to lift its
policy rate by 25 basis points next week to 1.75 percent, but
the amount of tightening seen by March slipped to 51 basis
points from 55 basis points before the data.           
    Separate data showed that the value of Canadian retail trade
unexpectedly fell by 0.1 percent in August, the second decline
in three months.
    The loonie had been trading higher ahead of the data as oil
prices rebounded. After the data it slumped to its weakest since
Sept. 11 at 1.3120 before recovering.
    At 9:44 a.m. (1344 GMT), the Canadian dollar          was
trading nearly unchanged at 1.3090 to the greenback, or 76.39
U.S. cents.
    The price of oil, one of Canada's major exports, rose on
signs of surging demand in China, the world's second-biggest oil
consumer. Still, the market was heading for a second week of
losses on rising U.S. inventories and concern that trade wars
were curbing economic activity.             
    U.S. crude        prices were up 0.9 percent at $69.26 a
    Canadian government bond prices were higher across the yield
curve, with the 10-year             rising 31 Canadian cents to
yield 2.462 percent.
    The gap between the 10-year yield and its U.S. equivalent
widened by 6 basis points to a spread of 73 basis points in
favor of the U.S. bond, the biggest gap since July 23.    

 (Reporting by Fergal Smith
Editing by Frances Kerry)