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* Canada dollar weakens overnight in thin market
* Canada unit seen vulnerable to further drops
* Bond prices mixed after Monday rally
By Lynne Olver
TORONTO, Dec 29 (Reuters) - The Canadian dollar was lower against the U.S. currency on Tuesday morning as oil prices slipped, setting a weaker tone for the Canadian unit after it failed to benefit from higher commodity prices on Monday.
Bond prices were mixed, with the long end down slightly, after Monday's gains across the yield curve on safe-haven buying.
At 9:25 a.m. (1425 GMT), the currency was at C$1.2261 to the U.S. dollar, or 81.56 U.S. cents in light trade. That was down from Monday's close of C$1.2184 to the U.S. dollar, or 82.07 U.S. cents.
Overnight, the Canadian dollar fell as low as C$1.2340 to the U.S. unit in illiquid markets as oil and gold prices weakened. Crude oil futures were at $38.93 a barrel in New York on Tuesday morning, down from the $40 area on Monday.
Commodity prices are usually a key driver for the Canadian currency due to the country's energy and materials exports.
The Canadian dollar looks vulnerable to further weakness on Tuesday, but "the market is just trying to feel its way," said Steve Butler, director of foreign exchange trading at Scotia Capital in Toronto.
"There's so much volatility, the ranges are quite wide these days, and people are just trying to get through month-end, quarter-end and year-end."
At this time of year, corporate flows are dictating movements, Butler said.
"I think a lot of the sellers have already sold, and the people that still need to buy for year-end are probably waiting in the wings, hoping for slightly better levels."
With no major economic data in Canada or the United States to lend direction and many market players taking an extended Christmas break, exaggerated moves in the North American currency pair could continue, traders and strategists said.
Butler said he would not rule out a U.S. dollar move above the C$1.2400 level in the coming sessions.
Domestic bond prices were mixed after a big rally on Monday. Short-dated bonds continued to make slight gains, but longer-dated bonds dropped.
The two-year bond was up 7 Canadian cents at C$103.08 to yield 1.117 percent. The 10-year bond was down 62 Canadian cents at C$112.85, yielding 2.694 percent.
The yield spread between the two-year and 10-year bond was at 158 basis points, down from 171 basis points at the previous close.
The 30-year bond was down 55 Canadian cents at C$128.50 to yield 3.423 percent. In the United States, the 30-year Treasury yielded 2.641 percent. (Reporting by Lynne Olver)