Canadian dollar drops to one-week low as oil and stocks slide

TORONTO (Reuters) - The Canadian dollar weakened to a one-week low against its U.S. counterpart on Wednesday as oil and stocks fell and investors weighed trade uncertainties ahead of fresh NAFTA talks.

U.S. and Canada Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

At 4 p.m. ET (2100 GMT), the Canadian dollar CAD=D4 was trading at C$1.2765 to the greenback, or 78.34 U.S. cents, down 0.3 percent.

“There was modest Canadian dollar weakness on the day,” said Eric Theoret, currency strategist at Scotiabank, citing nervousness in the market ahead of the latest round of NAFTA negotiations.

The Mexican peso MXN= meanwhile hit its weakest against the greenback since March before paring some losses.

On Tuesday, Canada launched a NAFTA challenge of a U.S. decision earlier this month to impose duties on softwood lumber exports from its northern neighbor.

NAFTA working groups are due to begin meeting from Wednesday in Mexico. Talks will begin on Friday and continue through Nov. 21.

The Canadian currency’s strongest level of the session was C$1.2714, while it touched its weakest since Nov. 7 at C$1.2789.

Prices of oil, one of Canada’s major exports, slipped for a fourth day on a gloomy outlook for oil demand growth from the International Energy Agency.

World stocks registered their longest losing streak in eight months, while the U.S. dollar .DXY recovered early losses against a basket of major currencies as U.S. data boosted expectations for further Federal Reserve interest rate hikes.

“For us, it’s still a spread story rather than a commodity story,” Theoret said, pointing to a widening gap between higher yields on U.S. two-years bonds versus their Canadian equivalents.

Less stimulus will be required over time but the Bank of Canada will remain cautious as it considers future interest rate moves, Senior Deputy Governor Carolyn Wilkins said, reiterating the central bank’s recent dovish tone.

Wilkins will speak about monetary policy amid uncertainty on Wednesday evening in New York.

Canada’s manufacturing sales data for September is due on Thursday and an October inflation report will be released on Friday.

“For Canada, the vulnerability would be to an upward surprise” in inflation, Theoret said, given the weakening trend in the currency since September’s surprise Bank of Canada decision to hike rates.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR rising 2.5 Canadian cents to yield 1.448 percent and the 10-year CA10YT=RR up 31 Canadian cents to yield 1.914 percent.

In domestic data, resales of Canadian homes rose 0.9 percent in October from September, the third straight monthly rise.

Additional reporting by Fergal Smith; Editing by Bernadette Baum and James Dalgleish