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CANADA FX DEBT-Canadian dollar slips to 6-day low, backing off key 1.20 threshold

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(New throughout, updates prices and market activity, adds comment from strategist) * Canadian dollar weakens 0.5% against the greenback * Loonie touches a 6-day low at 1.2124 * Price of U.S. oil settles 0.2% higher * Canadian 10-year yield hits its lowest level since April 15 By Fergal Smith TORONTO, May 26 (Reuters) - The Canadian dollar fell on Wednesday for a second day against its broadly stronger U.S. counterpart, with some investors possibly unwinding bullish positions in the Canadian currency when it failed to breach a key level. The loonie was trading 0.5% lower at 1.2117 to the greenback, or 82.53 U.S. cents, having hit its weakest since last Thursday at 1.2124. "Broad-based USD strength and CAD weakness on the crosses" helped push USD-CAD above the 1.2100 level, said George Davis, chief technical strategist at RBC Capital Markets, referring to the loonie's underperformance against some other G10 currencies as well as the greenback. It lost ground against the New Zealand dollar in particular after the Reserve Bank of New Zealand surprised markets by hinting at higher interest rates next year. The Bank of Canada has already signaled more hawkish guidance on the outlook for interest rates, which was one factor helping the loonie notch a six-year high last week at 1.2013. "Participants have been waiting to see how the pair (USD-CAD) trades around the psychological 1.2000 level, but with prices unable to push below here recently some short covering flows may be starting to appear," Davis said. The Bank of Canada is thinking in more concrete terms about how its digital currency might look and work but it does not currently see a strong case for issuing one, Deputy Governor Timothy Lane said. Oil , one of Canada's major exports, settled 0.2% higher at $66.21 a barrel as a drop in U.S. crude stockpiles reinforced expectations of improving demand ahead of the peak summer driving season. Canadian bond yields were mixed across the curve. The 10-year hit its lowest level since April 15 at 1.444% before rebounding to 1.453%, down less than one basis point on the day. (Reporting by Fergal Smith Editing by Bernadette Baum and David Gregorio)