CANADA FX DEBT-Canada dollar marks worst week since May

* C$ ends at C$0.9932 vs US$, or $1.0068
    * Hits lowest level since Aug. 24
    * Soft Canadian inflation data limits chance of rate rise
    * Currency ends week down 1.4 percent, biggest fall since

    By Claire Sibonney
    TORONTO, Oct 19 (Reuters) - The Canadian dollar dropped near
a two-month low on Friday and marked its worst weekly
performance since May on growing expectations that the Bank of
Canada will sound more dovish when it sets interest rates next
    Prices in Canada remained tame in September with inflation
at 1.2 percent, unchanged from August. The absence of inflation
pressure could set the stage for the central bank to ease its
hawkish bias when it holds its next policy meeting on Tuesday.
    "A lot of traders were readjusting their expectations this
morning," said Mark Frey, chief market strategist at Cambridge
Mercantile Group, in Victoria, British Columbia.
    Higher interest rates tend to help a country's currency
appreciate because they often attract international capital
flows and vice versa.
    Canada's risk-related currency was also vulnerable to the
perceived lack of progress on a Spanish bailout request, which
reminded investors of the headwinds facing the global economy.
    "Today's data aside, the overall macro environment and risk
with respect to equities and commodities is what drives the
Canadian dollar nine days out of 10," added Frey.
    The Canadian dollar ended the North American
session at C$0.9932 to the greenback, or $1.0068, compared with
C$0.9849, or $1.0153, at Thursday's close. 
    The currency hit an intraday low of C$0.9939, or $1.0061,
its weakest level since Aug. 24. It marked the biggest one-day
drop in four months.
    The Canadian dollar was down 1.4 percent for the week, its
steepest weekly decline in five months.
    The next significant support levels for the Canadian dollar
were seen around C$0.9960, followed by parity.
    The currency has fallen more than 1 percent this week,
underperforming other major currencies after Bank of Canada
Governor Mark Carney omitted previous language on possible
interest rate hikes in a speech he gave on Monday.
    Carney did say that the central bank would take whatever
action is necessary to keep the 2 percent inflation target and
acknowledged the effect global uncertainty was having on
Canada's resource-linked economy. 
    "The (inflation) report should weigh towards a softer
dollar, given the implications for the Bank of Canada," said Sal
Guatieri, senior economist at BMO Capital Markets.
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the
inflation data traders slightly increased their small bets on a
rate cut in the coming year. 
    A Reuters poll released on Thursday suggested the central
bank will postpone interest rate hikes until the fourth quarter
of next year and will likely water down, rather than eliminate,
its hawkish language. 
    Declines in the price of oil, gold and copper also weighed
on the commodity-linked currency, while a handful of
disappointing U.S. earnings reports added to the pessimistic
    Tech giants Microsoft and Google issued
lackluster earnings on Thursday, while General Electric 
reported revenue early on Friday that fell short of
    Besides the Bank of Canada policy announcement and monetary
policy report next week, investors will also be paying close
attention to the Federal Reserve rate decision U.S. third
quarter growth data.
    Canadian government bond prices rallied on renewed demand
for safe-have assets, mimicking U.S. Treasuries. 
    The rate-sensitive two-year bond outperformed its
U.S. counterpart, rising 8 Canadian cents to yield 1.090. The
benchmark 10-year bond jumped 47 Canadian cents to
yield 1.846 percent.