CANADA FX DEBT-C$ in modest retreat after soft inflation data

* Canadian CPI weaker than expected in July
    * C$ ends at C$0.9891 to the $US, or $1.0110
    * Bond yields fall

    By Solarina Ho
    TORONTO, Aug 17 (Reuters) - The Canadian dollar pared back
gains against the U.S. dollar on Friday after the country's
inflation data were weaker than expected in July, diminishing
odds the Bank of Canada will hike interest rates anytime soon.
    Consumers paid less for clothing and fuels such as gasoline
and natural gas in the month compared with a year earlier,
easing the annual inflation rate to 1.3 percent from 1.5 percent
in June. Analysts had expected inflation to be unchanged from
    "This morning's CPI report was obviously a little bit weaker
than the market was expecting. It does give reason for the
Canadian dollar to fall today," said Greg Moore, FX Strategist
at TD Securities, but added that the currency will likely
continue to test the C$0.9800 level.
    "Today's moves really weren't that far outside of the bull
range that's been persisting for the past month ... Regardless
of the small moves today which you can credit to the CPI
release, it doesn't really say much about where the currency
might go in the next few days," said Moore.
    Canada's dollar ended the session at C$0.9891 to
the U.S. dollar, or $1.0110, weaker than Thursday's close at
C$0.9867, or $1.0135. It fell as low as C$0.9902 to the U.S.
dollar, or $1.0099 following the inflation data.
    "We are medium term CAD bulls; but are concerned that in the
near-term CAD might have gotten a bit ahead of itself here.
Regardless, parity has become a very comfortable place for CAD
and we do not expect a substantial move in either direction,"
Camilla Sutton, Chief Currency Strategist at Scotiabank, wrote
in a note. 
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that traders slightly
decreased bets on any chance of a rate hike after the inflation
    The Federal Reserve's FOMC minutes will be closely watched
next week for further currency direction, while Bank of Canada
Governor Mark Carney is expected to speak at an event. Market
watchers will look closely for any change in the Canadian
central bank's hawkish tone.
    The Canadian dollar also backed off from a record high
against the euro hit in the previous session, though
it rallied against the Australian dollar on Friday,
touching its strongest level since late June.
    Canadian bond prices picked up and yields fell following the
disappointing inflation data.
    The interest-rate sensitive two-year bond rose
7.5 Canadian cents, yielding 1.201 percent, while the benchmark
10-year bond was up 13 Canadian cents, yielding
1.949 percent.