CANADA FX DEBT-C$ lower, but rise in inflation rate stems decline

* Canadian dollar at C$1.1133 or 89.82 U.S. cents
    * Bond prices mostly across the maturity curve

    By Leah Schnurr
    TORONTO, Feb 21 (Reuters) - The Canadian dollar weakened
against the greenback on Friday, extending a three-day sell-off
that has all but wiped out February's gains even as a
stronger-than-expected increase in inflation helped the currency
pare the worst of the day's declines.
    The closely watched report showed the annual Canadian
inflation rate unexpectedly jumped to 1.5 percent last month.
Analysts said the report reduced the likelihood of an interest
rate cut by the Bank of Canada, which has flagged its concerns
about a weak inflation environment. 
    Overnight index swaps, which trade based on expectations for
the central bank's policy rate, showed traders pared back their
already small bets on a rate cut in 2014 after the inflation
report was released.  
    "I think it does give the Bank of Canada a little more
breathing room with respect to inflation," said David Tulk,
chief Canada macro strategist.
    Still, the report was not enough to completely reverse the
Canadian dollar's weaker direction, as investors also took in 
separate data that showed retail sales slumped in December.
    "The inflation numbers were positive for a long-term
strengthening Canadian dollar story. However, you still need the
economy to perform well and we're going to need to see that in
the data in the next couple of months before the loonie starts
to gain some momentum," said Rahim Madhavji, president at in Toronto.
    The Canadian dollar ended the North American
session at C$1.1133 to the greenback, or 89.82 U.S. cents,
weaker than Thursday's close of C$1.1099, or 90.10 U.S. cents.
The currency earlier touched a session low of C$1.1196, putting
it within reach of a 4-1/2-year low.
    The Canadian dollar had clawed back some gains in the first
three weeks of February, bouncing back from a 4-1/2-year low hit
at the end of January. But that run higher was interrupted this
week after a disappointing wholesale trade report and the
currency is now up just 0.01 percent against its U.S.
counterpart for the month.
    The loonie is likely to see range-bound trade between C$1.10
and C$1.13, said Madhavji.
    Canadian government bond prices were mostly higher across
the maturity curve, though the two-year was off 1
Canadian cent to yield 1.009 percent, while the benchmark
10-year was up 20.1 Canadian cents to yield 2.412