CANADA FX DEBT-C$ falls most in 9 months as data points to rate hike pause

 (Updates to close, adds analyst comment and CFTC data)
    * Canadian dollar at C$1.2623, or 79.22 U.S. cents
    * Loonie touches its weakest since Aug. 31 at C$1.2630
    * Bond prices mixed across steeper yield curve
    * Canadian yields fall further below U.S. yields

    By Fergal Smith
    TORONTO, Oct 20 (Reuters) - The Canadian dollar suffered its
biggest drop in nine months against the greenback on Friday,
after domestic data showing a drop in retail sales added to
expectations that the Bank of Canada will leave interest rates
on hold next week.
    Retail sales fell by 0.3 percent in August from July,
pointing to a slowdown in growth after a hot first half of the
    Separate data showed that Canada's annual inflation rate
increased to 1.6 percent in September from 1.4 percent in
August, matching forecasts, but well below the Bank of Canada's
2 percent target.
    Perceived chances of another rate hike at next week's policy
decision slipped to less than 20 percent from 27 percent before
the data, the overnight index swaps market indicated.           
    The central bank hiked in July and September, the first rate
increases since 2010. But tougher new rules on mortgage lending,
finalized this week by Canada's banking regulator, could add to
the slowdown in Canada's previously red-hot housing market.
    The Office of the Superintendent of Financial Institutions
has given the Bank of Canada scope to ease the pace of rate
hikes, said Brad Schruder, director of corporate sales and
structuring at BMO Capital Markets.
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading at C$1.2623 to the greenback, or 79.22 U.S. cents, down
1.1 percent, its biggest drop since Jan. 18.
    The currency touched its weakest since Aug. 31 at C$1.2630.
For the week, it fell 1.3 percent.
    Losses for the loonie on Friday came as the U.S. dollar
       made its biggest daily gain in a month, as progress on
U.S. tax reforms raised prospects of a fiscal lift to the
    Speculators have trimmed bullish bets on the loonie, data
from the U.S. Commodity Futures Trading Commission and Reuters
calculations showed.
    As of Oct. 17, Canadian dollar net long positions had dipped
to 75,086 contracts from 76,392 a week earlier.
    U.S. crude        prices settled 18 cents higher at $51.47 a
barrel. Oil is one of Canada's major exports.                 
    Canadian government bond prices were mixed across a steeper
yield curve, with the two-year            up 2 Canadian cents to
yield 1.475 percent and the 10-year             falling 14
Canadian cents to yield 2.03 percent.
    Canadian yields fell further below yields on U.S. debt. The
10-year spread widened 4.5 basis points to a spread of -35.3
basis points, its biggest gap since Aug. 16.

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli and
James Dalgleish)