The Portugal international, who missed out on a place in Fernando Santos's 23-man squad for the World Cup, spent last season on loan at Inter Milan, making 26 Serie A appearances.
Despite failing to earn a seat on the plane to Russia, Cancelo is highly regarded in Europe and has recently been linked with both Manchester City and Manchester United.
The 24-year-old is also a client of Gestifute, the football agency run by Jorge Mendes, who has worked with Wolves over the past year and has several of his clients on their payroll.
According to Sky Sports News journalist Fabrizio Romano, Cancelo is in talks with the Molineux outfit over a prospective move for a fee believed to be in the region of €40m (£35m).
Cancelo joined Valencia in 2015 and is contracted to the Mestalla outfit until June 2021.