CANADA FX DEBT-C$ falls to 2-week low as CPI, fiscal cliff bite

* C$ at C$0.9927 vs US$, or $1.0074
    * Bond prices extend gains across the curve
    * Canada November CPI data disappoints

    By Claire Sibonney
    TORONTO, Dec 21 (Reuters) - The Canadian dollar hit a
two-week low against its U.S. counterpart on Friday after data
showed Canada's annual inflation rate fell to a three-year low
in November, adding to the cheerless mood in markets as U.S.
budget talks stalled.
    Inflation came in at 0.8 percent, weaker than analysts'
expectations and far below the Bank of Canada's 2.0 percent
target, which means the central bank is under no pressure to
raise interest rates soon. 
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the data
traders decreased their already small bets on a rate hike in
    Meanwhile, the Canadian economy eked out only a 0.1 percent
gain, indicating a very slow start to the fourth quarter amid
foreign and domestic economic woes. 
    "The CPI was probably the bigger surprise of the two.
Combined with renewed concerns over the fiscal cliff, I'd say
this combination is negative for the currency, mildly negative,"
said Doug Porter, deputy chief economist at BMO Capital Markets.
    Following the data, the currency touched a session
low C$0.9930 versus the greenback, or $1.0070, compared with
around C$0.9916, or $1.0085 heading into the reports.
    It was the currency's weakest level since Dec. 7.
    The Canadian dollar was already on softer ground as
growth-related currencies sold off after a Republican proposal
for averting the fiscal cliff failed to pass, dissipating hopes
that a deal would be reached soon in Washington.
    At 9:26 a.m. (1426 GMT), the currency was at C$0.9927, or
$1.0074, weaker than Thursday's North American session close at
C$0.9873 versus the U.S. dollar, or $1.0129.
    "The overwhelming issue affecting markets this week,
including today, is the U.S. fiscal cliff negotiations," said
Carlos Leitao, chief economist at Laurentian Bank Securities in
    "Here we are on Dec. 21 and besides being the (Mayan
calendar) end of the world, it's also very close to Christmas
and most people had expected, that by now, there would already
have been a deal. So from that perspective, it's a little
    Republican lawmakers on Thursday delivered a blow to their
leader, House of Representatives Speaker John Boehner, when they
failed to back a bill designed to extract concessions from
President Barack Obama. 
    That threw into disarray attempts to reach an agreement to
avert $600 billion of tax hikes and spending cuts that could
push the U.S. economy  back into recession next year, and
boosted demand for the most liquid government bonds and
safe-haven currencies.
     Canadian government bond prices added to earlier gains. The
two-year bond was up 5 Canadian cents, yielding 1.106
percent, while the benchmark 10-year bond climbed 37
Canadian cents to yield 1.798 percent.