TORONTO, Oct 22 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday after domestic data showed a surprise drop in retail sales and as investors worried that a minority government would make building of new oil pipelines more difficult.
At 9:07 a.m. (1307 GMT), the Canadian dollar was trading 0.2% lower at 1.3111 to the greenback, or 76.27 U.S. cents. Earlier in the session, the currency notched its strongest since July 22 at 1.3071.
Canada's energy industry saw its worst-case election result materialize on Monday as the Liberals failed to secure a majority government, leaving them in need of support from left-leaning parties that are opposed to new oil pipelines.
"The market will be watching closely for signs on how a minority government will manage the resource sector and how energy companies will react to the results," said Adam Button, chief currency analyst at ForexLive. "In the short term, there are some downside risks for the Canadian dollar but the rule of thumb on every election is to buy the dip and that will prove true again."
Oil is one of Canada's major exports, while the energy sector has the second largest weighting on Toronto's benchmark stock index at about 16%.
Still, S&P/TSX 60 futures were up about 0.4%, while oil prices climbed 1% to $53.85 a barrel after China signaled progress in trade talks with the United States.
The election outcome could also lead to increased fiscal spending. Trudeau has said he would nearly double the deficit from C$14 billion in the fiscal year that ended in March.
"To get support on Liberal bills, the government will need to include items supported by at least one of the other parties," said Craig Alexander, chief economist at Deloitte Canada. "This is likely to lead to modestly more government spending and investment."
Meanwhile, Canadian retail sales were down 0.1% in August from July, Statistics Canada said. Analysts had forecast a 0.4% increase.
The Bank of Canada will release the autumn issue of the Business Outlook Survey at 10:30 ET, which could help guide expectations for its policy outlook.
Canadian government bond prices were higher across the yield curve, with the two-year up 8.5 Canadian cents to yield 1.612% and the 10-year rising 39 Canadian cents to yield 1.522%.
The gap between Canada's 2-year yield and its U.S. equivalent narrowed by 2.7 basis points to a spread of 1.4 basis points in favor of Canada's bond. (Reporting by Fergal Smith Editing by Nick Zieminski)