Canadian dollar hits two-week high as inflation accelerates

The Canadian dollar strengthened to a two-week high against its US counterpart on Monday, while bond yields also rose after domestic data showed inflation accelerating more than expected, as investors awaited a key deadline for new US tariffs on Canadian goods.

The Canadian dollar gained 0.2% to C$1.3850 per US dollar, equivalent to 72.20 US cents, after touching C$1.3845 during the session, its strongest level since June 1.

Data showed that Canada’s annual inflation rate accelerated to 3% in July, exceeding expectations of 2.9%, as gasoline prices rose amid renewed tensions between the United States and Iran. Meanwhile, the two measures of underlying inflation, CPI-trim and CPI-median, came in at 1.9% and 2%, respectively.

“Overall, the July data remain consistent with a relatively favorable combination of improving economic growth and underlying inflation stabilizing near target,” RBC economists Nathan Janzen and Abbey Xu said in a note.

They added that the approaching US tariff deadline adds uncertainty and that the proposed measures would have significant consequences for some affected sectors and regions. However, their limited scope makes them unlikely to derail the broader economic recovery.

US tariffs add uncertainty

Canada’s 10-year government bond yield has risen by around 17 basis points over the past month, the largest increase among G7 bond yields excluding Japan, after employment, trade and gross domestic product data pointed to a recovery in the domestic economy following a slow start to the year.

The United States has said it will impose 50% tariffs from August 19 on roughly C$20 billion worth of Canadian goods, equivalent to about 5.2% of Canada’s exports to the United States.

Dominic LeBlanc, the Canadian minister responsible for trade with the United States, told an advisory committee on Friday that Canada and the United States remain far from reaching a draft trade agreement despite regular meetings between the two sides.

Separately, data showed that foreign investors made net purchases of C$40.83 billion ($29.46 billion) of Canadian securities in June, driven primarily by purchases of federal government bonds.

In the bond market, Canadian yields rose across the curve. The 30-year yield climbed 2.6 basis points to 4.117%, after earlier reaching 4.145%, its highest level since March 2010.