* Inflation data supports call for March rate cut
* C$ shaken overnight by drop in oil prices
* Bonds pinned lower along with U.S. Treasuries
By Frank Pingue
TORONTO, Jan 23 (Reuters) - The Canadian dollar fell versus the U.S. dollar on Friday morning as the latest Canadian inflation data supported predictions for more Bank of Canada interest rate cuts, while prices for oil, a key Canadian export, turned lower.
Canadian bond prices took their cue from the bigger U.S. Treasury market and were lower across the curve due to concerns about heavy supply of government paper in the United States.
At 9:45 a.m. (1445 GMT), the Canadian unit was at C$1.2589 to the U.S. dollar, or 79.43 U.S. cents, down from C$1.2537 to the U.S. dollar, or 79.76 U.S. cents, at Thursday's close.
Earlier, it had fallen as low as C$1.2652 to the U .S. dollar, or 79.04 U.S. cents.
A good portion of the Canadian currency's drop followed a report that showed Canada's inflation rate eased in December, which increased the likelihood that the Bank of Canada will cut its key rate below 1.00 percent in March.
But the currency had already been falling during the overnight session due to a combination of lower prices for key Canadian exports such as oil, and demand for the U.S. dollar given its reputation for being a safe-haven play.
"The inflation numbers were unambiguously weak, softer than the market expected and I have to think contributing to the weaker Canadian dollar," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"You've also got significant weakness in some of the other commodity players out there and a lot of strength in the U.S. dollar, so there are clearly other forces out there as well."
The Canadian dollar was up as much as 3.6 percent at one point earlier in the year as Middle East tensions help lift commodity prices.
But a turnaround in those prices and a string of weak data have left the currency down 3.1 percent on the year and not far off a seven-week low.
With the latest key piece of data now out of the way, it appears that next week's annual budget from the Conservative government stands as the next item to weight on the Canadian dollar.
A report on Thursday said Canada will post C$64 billion in deficits over the next two fiscal years to stimulate a flagging economy but will return to surplus in five years.
"Markets are already steeled to the expectation that there will be some pretty substantial deficits," Lascelles said.
"The market has a good handle of the magnitude of that situation and I don't expect the Canadian dollar to get a whole lot weaker, but that is probably the risk over the near term."
Lascelles said he expects the Canadian currency will likely attract buyers whenever it nears the C$1.30 level just at it did when it nears the level in November and December.
Canadian bond prices were all lower as dealers fretted over the impact of large amounts of new debt in the United States that are expected in the coming years, but a slide in equity markets at the open helped to cushion the drop in prices for government debt.
"Investors are worried about the (U.S.) government's mounting obligations, so I think it's generally concern about supply and the government's growing debt," said Sal Guatieri, senior economist at BMO Capital Markets.
The two-year bond was down 13 Canadian cents at C$102.78 to yield 1.220 percent, while the 10-year bond fell 23 Canadian cents to C$112.02 to yield 2.780 percent.
The 30-year bond was down 5 Canadian cents at C$124.35 to yield 3.619 percent. In the United States, the 30-year Treasury yielded 3.3528 percent. (Editing by Peter Galloway)