C$ pulls back from 2-week high on Wall Street jitters

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar edged lower against its U.S. counterpart on Monday, with the currency pulling back from an earlier two-week high, as equity markets fell and investors braced for the potential start of Bank of Canada interest rate cuts.

The loonie was trading 0.1% lower at 1.3645 to the U.S. dollar, or 73.29 U.S. cents, after touching its strongest intraday level since May 20 at 1.3604.

"It looks like the softer U.S. manufacturing data weighing on equities ultimately has won out on the session and given the CAD a turn back lower," said Amo Sahota, a director at Klarity FX in San Francisco.

Wall Street's main indexes fell in choppy trading after data showed that U.S. manufacturing activity slowed for a second straight month in May. Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to shifts in investor sentiment.

U.S. crude oil futures settled down 3.6% at $74.22 a barrel as investors digested the complex deal brokered by producer group OPEC+ to extend various layers of output cuts.

Domestic data also showed a slowdown in manufacturing. The S&P Global Canada Manufacturing Purchasing Managers' Index (PMI) edged down to a seasonally adjusted 49.3 in May from 49.4 in April.

"I think traders are trying to avoid a directional break in the loonie until they see the BoC policy print this week," Sahota said. "A policy cut is priced in to the swap market, but spot FX is still exposed to volatility on the messaging this week."

The BoC will trim its key interest rate by 25 basis points to 4.75% on Wednesday, according to three-quarters of economists in a Reuters poll.

Canadian bond yields moved lower across the curve, tracking moves in U.S. Treasuries. The 10-year was down 10.6 basis points at 3.524%.

(Reporting by Fergal Smith; Editing by Paul Simao)