Canadian government bond yields moved lower on Thursday as U.S. inflation metrics indicated softer price pressures and a Canadian government source said trade negotiations with Washington were advancing. Investors responded by trimming yields and maintaining the Canadian dollar near recent highs.
The yield on the 10-year Canada bond fell 7.1 basis points to 3.621%, tracking the direction of U.S. Treasuries. Earlier in the week the same benchmark had risen to a two-year peak of 3.755% on Tuesday, a move linked to recent Canadian jobs and GDP data that signaled a recovery in Canada’s economy.
U.S. producer prices were unchanged in July as declines in goods prices were offset by modest increases in services. On a year-over-year basis, the producer price inflation rate cooled to 4.7% from 5.5% in June. Market participants read the moderation as reinforcing expectations that the Federal Reserve may choose not to change interest rates at its meeting next month.
"The report indicated that inflationary pressures remain elevated but eased during the month," said Colin Cieszynski, chief market strategist at SIA Wealth Management, in a note commenting on the U.S. data.
The Canadian dollar was largely unchanged at 1.3935 per U.S. dollar, equivalent to 71.76 U.S. cents, after trading between 1.3930 and 1.3958. On Wednesday, the currency had reached its strongest intraday level since June 10 at 1.3905.
A Canadian government source with direct knowledge of discussions with U.S. officials said the talks were progressing well. The source added that Washington had sought to reach an agreement ahead of a new U.S. tariff deadline on August 19.
Markets appear to have parsed the combination of cooler U.S. producer inflation and diplomatic progress as reasons to reduce near-term rate-hike risk and to keep the Canadian dollar near recent strength. The interplay between U.S. inflation readings, central bank policy expectations, and bilateral trade negotiations will remain focal points for fixed income and currency markets in the near term.