CANADA FX DEBT-C$ weakens as subdued inflation reduces rate hike chances

 (Adds analyst comment, details; updates prices)
    * Canadian dollar at C$1.3267, or 75.37 U.S. cents
    * Canada's annual inflation rate cools to 1.3 percent in May
    * Bond prices higher across a steeper yield curve

    By Fergal Smith
    TORONTO, June 23 (Reuters) - The Canadian dollar fell on
Friday against its U.S. counterpart after weaker-than-expected
domestic inflation data reduced the chances of an interest rate
hike next month from the Bank of Canada.
    The annual inflation rate cooled to 1.3 percent in May,
below forecasts for 1.5 percent, pushing it further away from
the Bank of Canada's 2 percent target. The central bank's three
measures of core inflation remained subdued.                 
    "It is going to be very difficult for the Bank (of Canada)
to hike as soon as next month when you still haven't carved out
a bottom on inflation," said Derek Holt, head of capital markets
economics at Scotiabank.
    Chances of a hike in July fell to just 22 percent from
one-in-three before the inflation report, data from the
overnight index swaps market showed.           
    The Bank of Canada's top two officials last week said that
looser monetary policies put in place in 2015 had largely done
their work, and the bank would assess whether rates must remain
at near-record lows.             
    Analysts expect policymakers to stay hawkish amid concern
that rates have been low too long.              
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading at C$1.3267 to the greenback, or 75.37 U.S. cents, down
0.2 percent. It traded in a range of C$1.3211 to C$1.3307
    For the week, the loonie lost 0.4 percent.
    The impact of the weaker inflation data on the currency was
tempered by a rally in crude oil, said Karl Schamotta, director
of global markets strategy at Cambridge Global Payments. 
    Prices of oil, one of Canada's major exports, crept up from
a 10-month low earlier this week. U.S. crude oil futures       
settled 27 cents higher at $43.01 a barrel.
    Speculators cut bearish bets on the Canadian dollar for a
fourth straight week, data from the U.S. Commodity Futures
Trading Commission and Reuters calculations showed. Canadian
dollar net short positions fell to 82,881 contracts as of June
20 from 88,595 a week earlier.
    Canadian government bond prices were higher across a steeper
yield curve, with the two-year            up 7 Canadian cents to
yield 0.898 percent and the 10-year             rising 19
Canadian cents to yield 1.479 percent.
    The two-year yield fell 3.9 basis points further below its
U.S. equivalent to a spread of -44.7 basis points, as Canadian
bonds outperformed. On Thursday, the spread touched its
narrowest in nearly four months at -40.8 basis points.

 (Reporting by Fergal Smith; Editing by W Simon and Leslie