CANADA FX DEBT-C$ weakens after oil price fall, inflation eyed

(Adds strategist comment, updates prices to close)
    * Canadian dollar at C$1.2498, or 80.01 U.S. cents
    * Bond prices mostly higher across maturity curve

    By Alastair Sharp
    TORONTO, Feb 19 (Reuters) - The Canadian dollar slipped
against its U.S. counterpart on Thursday, its second straight
decline on renewed weakness in crude oil prices, as the Bank of
Canada said cheap oil could push domestic inflation into
negative territory.
    The currency recovered somewhat in afternoon trade, tracking
a similar paring of losses in the oil market. 
    Canada is a major oil producer, and weakness in the price of
crude has weighed on the currency for months. A surprise
interest rate cut last month also pressured the currency.
    Agathe Côté, a deputy governor at the central bank, said in
a speech on Thursday there was no need to fear oil-related
deflation and that the next interest rate decision due on March
4 had not been predetermined. 
    "The speech today alluded to that (oil price
fall)potentially leading price pressures into negative territory
but she did mention that doesn't necessarily mean that the
Canadian economy is heading into a deflationary spiral," said
Bipan Rai, director of foreign exchange strategy at CIBC World
    The Canadian dollar ended the session at C$1.2498
to the greenback, or 80.01 U.S. cents, weaker than Wednesday's
close of C$1.2418, or 80.53 U.S. cents.
    Rai said the currency could test C$1.28 in the near term,
and even push towards C$1.30 in coming months as monetary policy
divergence between Canada and the United States plays out.
    Canadian government bond prices were mostly higher across
the maturity curve, although the two-year slipped 1
Canadian cent to yield 0.427 percent. The benchmark 10-year
 rose 16 Canadian cents to yield 1.457 percent.
    Mark Chandler, head of Canadian fixed income and currency
strategy at Royal Bank of Canada, said Canada's currency will
likely face more obstacles in coming weeks and months as
slumping oil prices feed into softer economic data.
    "Unequivocally, over the next three months or so you're
going to see a patch of soft data coming out in Canada related
to the oil price decline. It's hard to bet against the trend of
a weaker Canadian dollar going forward."

 (Reporting by Alastair Sharp; Editing by Bernadette Baum and
Meredith Mazzilli)