CANADA FX DEBT-C$ hits 4-1/2-year low; dovish cenbank, weak China data eyed

* Canadian dollar at C$1.1099 or 90.10 U.S. cents
    * Bond prices higher across maturity curve

    By Leah Schnurr
    TORONTO, Jan 23 (Reuters) - The Canadian dollar touched a
4-1/2-year low against the greenback on Thursday as it was hit
by dovish language from the Bank of Canada and a contraction in
China's vast manufacturing industry.
    The battered loonie was able to claw back some of its
declines after the low touched in trading overnight, helped by a
larger-than-expected rise in Canadian retail sales in November.
    Still, the Canadian dollar remained under pressure for the
third session in a row. Selling had 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 the Bank of Canada noted the stimulative impact on
exports and economic growth from the Canadian dollar's recent
depreciation, the central bank also said the currency was still
strong and that its strength posed an obstacle for exports.
    "The market looked at that statement and said to themselves,
'The Bank is not concerned about the swift devaluation of the
currency,' and generally speaking, market animal forces will
generally say, 'Lets see how far we can push this,'" said Brad
Schruder, director of foreign exchange sales at BMO Capital
Markets in Toronto.
    "That's one of the reasons why there are three trades to
play when it comes to Canada: you can be on the sidelines; you
can be a tiny short, or you can be very short. But being long
Canada is probably the most perilous position I'd say in all
currency markets right now."
    The Canadian dollar ended the North American
session at C$1.1099 to the greenback, or 90.10 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 Canadian currency was also pressured by data overseas
that showed activity in China's manufacturing industry
contracted for the first time in six months. 
    The loonie has been on a downward path since late October
last year when the Bank of Canada shifted policy gears by
dropping any mention of interest rate hikes after 18 months of
signaling policy tightening was on the horizon. The Canadian
currency has dropped more than 7 percent since then.
    With the Bank of Canada's concern about the weak inflation
environment, Friday's domestic inflation report could be a
significant driver for the currency. 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 8 Canadian cents
to yield 0.971 percent, the first time it has fallen below 1
percent since May 2013. The benchmark 10-year was up
64 Canadian cents to yield 2.411 percent.