CANADA FX DEBT-C$ weakens, pressured by NAFTA risk and cooler inflation

    * Canadian dollar at C$1.2879, or 77.65 U.S. cents
    * Loonie falls 0.5 percent, down 0.7 percent for the week
    * Canada's inflation rate cools to 2.2 percent in April
    * Bond prices higher across yield curve

    By Fergal Smith
    TORONTO, May 18 (Reuters) - The Canadian dollar weakened
against the greenback on Friday as an uncertain outlook for the
NAFTA trade pact and weaker-than-expected domestic inflation
data clipped expectations for a Bank of Canada interest rate
hike as early as this month.
    Mexico's Economy Minister Ildefonso Guajardo said that U.S.
Trade Representative Robert Lighthizer was right that many
issues must still be resolved in current trade negotiations to
revamp the North American Free Trade Agreement, but added they
were not technically complicated.             
    "NAFTA still remains a wildcard," said Brad Schruder,
director of corporate sales and structuring at BMO Capital
Markets. "The Bank of Canada can't afford to step in front of
that decision unless there is compelling data to do so."
    Canada's annual inflation rate cooled modestly to 2.2
percent in April, short of economist expectations for 2.3
percent, data from Statistics Canada showed.             
    Still, two out of three of the central bank's core inflation
measures rose and separate data showed that Canadian retail
sales rose by the most in five months.
    It fits with the Bank of Canada's view that it is going to
have to raise interest rates further but "inflation isn't really
pushing them to do it in a really fast way that would
destabilize the household sector," said Nathan Janzen, senior
economist at Royal Bank of Canada.
    The central bank has raised its benchmark interest rate
three times since July to leave it at 1.25 percent. Chances of
another hike at the May 30 announcement sank to 33 percent from
nearly 50 percent before the data.           
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading 0.5 percent lower at C$1.2879 to the greenback, or 77.65
U.S. cents.
    The currency touched its weakest since Tuesday at C$1.2911.
For the week, the loonie fell 0.7 percent.
    Declines for the loonie came as the U.S. dollar rose to a
five-month peak against a basket of currencies and the price of
oil fell.                         
    Speculators have cut bearish bets on the Canadian dollar for
the second straight week, data from the U.S. Commodity Futures
Trading Commission and Reuters calculations showed. As of May
15, net short positions had dipped to 23,656 contracts from
23,861 a week earlier.
    Canadian government bond prices were higher across the yield
curve, with the 10-year             rising 29 Canadian cents to
yield 2.486 percent. Canada's bond and stock markets will be
closed on Monday for the Victoria Day holiday.

 (Reporting by Fergal Smith; editing by Diane Craft)