CANADA FX DEBT-C$ hits 3-1/2-yr low as rates seen low for some time

* Canadian dollar at C$1.0700 or 93.46 U.S. cents
    * Inflation 0.9 pct in Nov, core 1.1 pct
    * Bond prices higher across the maturity curve

    By Leah Schnurr
    TORONTO, Dec 20 (Reuters) - The Canadian dollar weakened to
a 3-1/2-year low against the greenback on Friday after data
showing a deceleration in domestic annual core inflation
underscored expectations interest rates will stay low for some
    Canada's annual overall inflation rate edged higher last
month, though it remained below the Bank of Canada's target
range. But core inflation, which strips out volatile items and
is watched by the central bank, slipped on the month.
    A more neutral policy shift from the Bank of Canada has
weighed on the loonie in recent months as investors pushed their
expectations for when interest rates will rise further out into
the future. The currency has lost about 4 percent since late
October when the Bank of Canada dropped its tightening bias.
    Friday's inflation report "helps fuel the growing narrative
that the Bank of Canada is becoming increasingly more dovish,"
said Mazen Issa, macro strategist at TD Securities in Toronto. 
    "Certainly the risk that the Bank adopts an explicit easing
bias in January continues to grow and this report provides lends
further credence to that view."
    The Canadian dollar was at C$1.0700 to the
greenback, or 93.46 U.S. cents, weaker than Thursday's close of
C$1.0666, or 93.76 U.S. cents.
    The currency traded as far as C$1.0737, its lowest level
since May 2010. Analysts expect there should be technical
support around the C$1.07 level.
    Both the total and core inflation rates were below market
expectations. Inflation has been below the Bank of Canada's 2
percent target for 19 months.
    "It now looks like core inflation is going to average about
two-tenths below what the Bank of Canada expected in the fourth
quarter, possibly three-tenths below - so it's a fairly big miss
by the Bank on core inflation," said Doug Porter, chief
economist at BMO Capital Markets in Toronto.
    Investors were also taking in separate data that showed
Canadian retail sales unexpectedly fell in October.
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 3 Canadian cents
to yield 1.22 percent and the benchmark 10-year up
20 Canadian cents to yield 2.679 percent.