CANADA FX DEBT-C$ bounces from 3-1/2-year low but outlook still weak

* Canadian dollar at C$1.0648 or 93.91 U.S. cents
    * Inflation 0.9 pct in November, core 1.1 pct
    * Bond prices up across the maturity curve

    By Leah Schnurr
    TORONTO, Dec 20 (Reuters) - The Canadian dollar strengthened
modestly against the greenback on Friday, recovering from a
3-1/2-year low as investors booked profits, though the broader
trend of a weaker loonie was expected to continue into the new
    The currency started the day on a weak footing, dropping
after data showed Canada's annual inflation rate edged up in
November but remained below the Bank of Canada's target range.
    As well, core inflation, which strips out volatile items and
is watched by the central bank, slipped on the month. The report
reinforced analysts expectations that rates will stay low for
some time. 
    The figures sent the Canadian dollar to its lowest level
since May 2010 but the loonie was able to claw its way higher
into the close of the North American session.
    "The CPI disappointed and that's how we got to the weak
levels that we saw early this morning. Since then, a lot of
people apparently were looking to buy the Canadian dollar on the
dips," said Greg Anderson, global head of foreign exchange
strategy at BMO Capital Markets in New York.
    Stronger oil prices, as well as some improved risk appetite,
also gave the currency some support, said Anderson.
    South of the border, the economy grew at its fastest pace in
almost two years in the third quarter, taking some of the sting
out of the Federal Reserve's decision this week to begin
reducing its economic stimulus. 
    "The best of all worlds is that the economy is strong enough
that the Fed can step out and that seems to be the news from the
GDP," said Anderson.
    The Canadian dollar ended the North American
session at C$1.0648 to the greenback, or 93.91 U.S. cents,
stronger than Thursday's close of C$1.0666, or 93.76 U.S. cents.
    The currency traded as far as C$1.0737 in the morning, its
lowest level since May 2010. 
    A more neutral policy shift from the Bank of Canada has
weighed on the loonie in recent months as investors pushed their
expectations for when interest rates will rise further out into
the future. The currency has lost more than 3 percent since late
October when the Bank of Canada dropped its tightening bias.
    Friday's inflation report "helps fuel the growing narrative
that the Bank of Canada is becoming increasingly more dovish,"
said Mazen Issa, macro strategist at TD Securities in Toronto. 
    "Certainly the risk that the bank adopts an explicit easing
bias in January continues to grow and this report lends further
credence to that view."
    Weakness for the loonie is expected to continue into 2014,
said Anderson, who sees the currency trading as low as C$1.10
next year.
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 6.2 Canadian
cents to yield 1.107 percent and the benchmark 10-year
 up 26 Canadian cents to yield 2.672 percent.