CANADA FX DEBT-C$ at 4-1/2-yr low after dovish central bank, China data

* Canadian dollar at C$1.1124 or 89.90 U.S. cents
    * Bond prices higher across the maturity curve

    By Leah Schnurr
    TORONTO, Jan 23 (Reuters) - The Canadian dollar tumbled to a
4-1/2-year low against the greenback on Thursday, breaking
through the C$1.11 level as it was hit by dovish language from
the Bank of Canada and a contraction in China's vast
manufacturing industry.
    The battered loonie got some relief from data that showed a
larger than expected rise in Canadian retail sales in November,
which helped the currency trim declines. 
    Still, the Canadian dollar remained under pressure for the
third session in a row. Selling intensified on Wednesday after
the Bank of Canada said it has become more concerned about weak
inflation and left the door open to a rate cut. 
    "The slightly dovish slant to the (Bank of Canada's)
Monetary Policy Report has definitely given the loonie bears the
green light to go ahead and continue to hit the sell button,"
said Scott Smith, senior market analyst at Cambridge Mercantile
Group in Calgary.
    "While markets were fairly positioned to see a neutral to
dovish slant from the Bank of Canada, this is just reaffirming
markets' expectations that the path for U.S. dollar-Canadian
dollar higher is still intact and we're not going to see
anything from the Bank of Canada or Canadian policymakers that
is going to jeopardize (the trend)," said Smith.
    While the Bank of Canada noted the stimulative impact on
exports and economic growth from the Canadian dollar's recent
depreciation, the bank also said the currency was still strong
and that its strength still posed an obstacle to exports.
    "It feeds back into this (idea), We're happy with the price
action of how U.S. dollar-Canadian dollar has unfolded and we
won't try and step in if the Canadian dollar continues to weaken
because that's only going to help improve our terms of trade,"
said Smith.
    The Canadian dollar was at C$1.1124 to the
greenback, or 89.90 U.S. cents, weaker than Wednesday's close of
C$1.1088, or 90.19 U.S. cents. It traded as low as C$1.1174
overnight, its lowest level since July 2009. The C$1.12 area
should act as a cap for the remainder of the week, said Smith.
    The Canadian currency was also pressured by data overseas
that showed activity in China's manufacturing industry
contracted for the first time in six months. 
    Focus will start to turn to Friday's domestic inflation
report, which could be a significant driver for the loonie. The
annualized inflation rate is forecast to pick up to 1.3 percent
in December. 
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 4-1/2 Canadian
cents to yield 0.986 percent while the benchmark 10-year
 was up 43 Canadian cents to yield 2.437 percent.