Canadian dollar nears two-month high as bond yields decline

Canadian government bond yields fell across maturities on Wednesday, while the Canadian dollar remained close to a two-month high against the US dollar after US inflation data reduced expectations for a Federal Reserve interest rate hike next month.

Canadian dollar nears two-month high

Domestic data showed that the value of Canadian building permits jumped 18.5% in June following declines in April and May, driven mainly by the non-residential construction sector.

The Canadian dollar weakened 0.1% to C$1.3940 per US dollar, equivalent to 71.74 US cents, after touching C$1.3909 during the session, its strongest level since June 10.

On the trade front, the Globe and Mail reported that Canada is considering a proposal to accept US tariffs on automobiles in exchange for lower tariffs on vehicles that comply with the United States-Mexico-Canada Agreement (USMCA), citing people familiar with the matter.

The Canadian dollar also faced modest pressure from oil prices, one of Canada's major exports, with crude prices slipping around 0.1% to $83.11 a barrel after forecasters lowered their outlooks for global oil demand in 2026.

Bonds

Canada's 10-year government bond yield fell 2.3 basis points to 3.685%, after earlier approaching 3.755%, its highest level since May 2024 and a level also reached on Tuesday.

Over roughly the past month, Canada's 10-year yield has risen around 17 basis points, by far the largest increase among government bonds across the Group of Seven nations, as signs emerged that the Canadian economy was recovering from a slow start to the year, supported by employment, trade and gross domestic product data.

The two-year Canadian government bond yield has also risen by around 16 basis points over the same period.

Robert Both, senior macro strategist for Canada at TD Securities, said comparing the performance of economic data over the past six weeks helps explain why Canada has outperformed the US at the short end of the yield curve.

US data showed consumer prices rose only marginally in July, while gasoline prices declined for a second consecutive month and underlying inflation remained contained, reinforcing expectations that the Federal Reserve could refrain from raising interest rates in September.

The data came as attacks on commercial vessels continued in the Middle East and talks aimed at ending the war between Iran and the US remained deadlocked, keeping energy markets under heightened uncertainty.