* C$ edges up as oil rebounds to settle higher
* Big drop in Nov retail sales pressured market early
* BoC forecast of deep, short recession has little impact
* Bonds hurt by supply concerns due to stimulus spending
By Jennifer Kwan
TORONTO, Jan 22 (Reuters) - The Canadian dollar edged higher against the U.S. currency on Thursday, rebounding from early weakness as the price of oil, a major Canadian export, bounced higher.
The currency was at C$1.2537 to the U.S. dollar, or 79.76 U.S. cents, up from C$1.2558 to the U.S. dollar, or 79.63 U.S. cents, on Wednesday. It hit a low of C$1.2741 to the U.S. dollar, or 78.49 U.S. cents, early in the session after figures showed Canadian retail sales were worse than expected in November [ID:nN22].
In the United States weekly jobless claims rose more than expected, while housing starts and permits fell to a record low in December. [ID:nN22528164]
"We saw some strong risk aversion backed by both the very disappointing U.S. data and Canadian data and, consequently, the Canadian dollar selling off," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
Also moving the currency, the price of oil CLc1 rose to settle at $43.67 a a barrel after earlier falling as low as $40.41. [ID:nSP391920]
Strauss said that any gains in the Canadian dollar are "very tentative and could very easily reverse" not only from day to day but also throughout the day.
The Bank of Canada said on Thursday the economy will contract by an exceptionally sharp 4.8 percent in the first quarter of this year and continue to shrink through mid-year, but that recovery will be swifter than in the past two recessions. [ID:nN22537605]
The report did not have any notable impact on the Canadian currency, market watchers said.
Most Canadian government bond prices followed the U.S. Treasury market lower, due in part to supply concerns. [ID:nN22534628] Earlier, bond prices were higher as money flowed out of equities and into safer havens.
"I think the underlying story here is that U.S. bonds are struggling a bit because of concerns over the supply outlook -- in other words all the borrowing that Washington is going to have to do," said Doug Porter, deputy chief economist at BMO Capital Markets.
"We got an echo of that in Canada today when it was flagged that the budget deficit is going to be C$34 billion in the coming year."
A senior government official said on Thursday that Canada will post a deficit of C$64 billion over the next two fiscal years as it moves to stimulate the flagging economy, but the official said the budget will return to surplus in five years. [ID:N2281505]
The two-year bond dropped 13 Canadian cents to C$102.91 to yield 1.153 percent, while the 10-year bond fell 18 Canadian cents to C$112.22 to yield 2.757 percent.
The 30-year bond fell 10 Canadian cents to yield 3.626 percent. In the United States, the 30-year Treasury yielded 3.2604 percent. (Editing by Peter Galloway)