* C$ hits lowest close in a week as oil below $38 a barrel
* Bonds higher as Toronto stocks selloff 3.2 percent
* BoC surveys show worse credit conditions, glum sentiment
By Jennifer Kwan
TORONTO, Jan 12 (Reuters) - The Canadian dollar finished at its lowest level in a week against the U.S. currency on Monday as two Bank of Canada reports were seen as increasing the chances of another big interest rate cut and the price of oil fell below $38 a barrel.
The Canadian currency closed at C$1.2154 to the U.S. dollar, or 82.28 U.S. cents, down from C$1.1908 to the U.S. dollar, or 83.98 U.S. cents, on Friday.
Bond prices were higher as money flowed from riskier assets with Toronto’s main stock index .GSPTSE closing down 3.2 percent.
Two surveys from the Bank of Canada helped sour the market mood, showing lending conditions in the country worsened considerably in the fourth quarter and that overall business sentiment is at its lowest point in at least a decade. [ID:nN12332202]
“It does appear the recession in Canada is deepening, credit conditions are tightening to extreme levels, and that sort of builds the case, potentially, for the Bank of Canada to perhaps ease (interest rates) even more aggressively,” said Michael Gregory, senior economist at BMO Capital Markets.
“The prospects for that have caused the currency to weaken off.”
The Canadian currency was also pressured by a slide in the price of oil CLc1, which dropped nearly 8 percent to settle at $37.59 a barrel as the global economic downturn weakens demand. [ID:nSYD425287].
Canada is a major oil producer and exporter and any movements in the price of crude often sways the Canadian currency. Oil has fallen from its peak above $147 a barrel reached in July.
The Canadian currency continued its descent after a negative tone set by reports on Friday from both Canada and the United States that showed disappointing monthly employment figures that further heightened concerns about the depth of the U.S. recession.
Canadian government bond prices were higher on the bleak picture drawn from the Bank of Canada surveys, and as Toronto equities fell for a second straight session.
The sullen economic readings in recent days have raised the chances that the Bank of Canada will cut interest rates further on Jan. 20, economists and strategists say.
Bond prices may also be getting additional support as markets have second thoughts about the sudden big increase in risk appetite that seemed to occur early in the year.
“It’s more of a reality check,” said Derek Holt, economist at Scotia Capital.
The two-year bond was up 11 Canadian cents at C$103.19 to yield 1.032 percent, while the 10-year bond rose 45 Canadian cents to C$112.25 to yield 2.758 percent.
The yield spread between the two-year and 10-year bond was at 172 basis points versus 171 at the previous close.
The 30-year bond was up 45 Canadian cents to yield 3.608 percent. In the United States, the 30-year Treasury yielded 2.9972 percent. (Reporting by Jennifer Kwan; editing by Peter Galloway)