CANADA FX DEBT-Loonie pares weekly gain as soft data lifts rate cut bets

Fergal Smith

(Adds details throughout and updates prices)

* Loonie weakens 0.3% against the greenback

* Canadian retail sales decrease by 1.2% in October

* Loonie ends week up 0.1%

* Canadian bond prices rise across the yield curve

TORONTO, Dec 20 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday, giving up much of this week's gains after domestic data showing a surprise decline in retail sales revived bets for a Bank of Canada interest rate cut next year. Canadian retail sales dropped by 1.2% in October, including lower sales of motor vehicles and parts, Statistics Canada said. Analysts had forecast a 0.5% increase. "With the exception of housing markets, Canadian economic releases in the past few weeks have been unambiguously negative," Omar Abdelrahman, an economist at TD Economics, said in a note. "This one is no different. As a result, we are expecting a continued tepid performance for the Canadian economy in the fourth quarter." Chances of a rate cut over the coming year, which had dwindled in recent weeks, jumped to nearly 50% from about 25% before the retail sales report, the overnight index swaps market indicated. Separate data showed that new-home prices fell 0.1% in November after rising 0.1% in October.

trading 0.3% lower at 1.3159 to the greenback, or 75.99 U.S. cents. The currency, which notched on Wednesday a seven-week high at 1.3103, traded in a range of 1.3123 to 1.3181. For the week, the loonie was up 0.1% after a boost from data showing higher Canadian underlying inflation and a trade deal between the United States and China. Canada is a major exporter of commodities, including oil, so its economy could benefit from an improved outlook for global trade.

barrel on Friday but were still up for the third straight week after easing U.S.-Chinese trade tensions lifted business confidence and the outlook for global economic growth.

Canadian government bond prices were higher across the yield

cents to yield 1.620%. The gap between Canada's 10-year yield and its U.S. counterpart widened by 5.2 basis points to a spread of 29.9 basis points in favor of the U.S. bond.

(Reporting by Fergal Smith; Editing by Steve Orlofsky and Will Dunham)