Canadian Dollar Remains Near One-Year Low

Canada's 10-year government bond yield held steady at 3.44% in July as lower oil prices and weaker-than-expected US jobs data reinforced expectations of a more accommodative monetary policy outlook. Oil prices remained near pre-conflict levels amid optimism over US-Iran peace efforts, easing concerns about energy-driven inflation and supporting expectations that the BoC will keep interest rates unchanged if disinflation continues. Meanwhile, North American bond yields came under pressure after weak US labor market data reduced expectations of a near-term Federal Reserve rate hike. Uncertainty surrounding negotiations to revise the USMCA also weighed on Canada's economic outlook, dampening prospects for future BoC tightening. At the same time, the Bank of Canada's preferred core inflation measures remained close to the 2% target in May despite higher energy prices, supporting the view that the inflationary effects of the Iran conflict are likely to be temporary.

The Canadian dollar traded near 1.42 per USD in July, remaining close to a one-year low as pressure from lower oil prices outweighed a softer the US dollar following their weak jobs report. The Canadian currency continued to face headwinds from lower global oil prices, which have reduced Canada's terms-of-trade advantage and reinforced expectations that the BoC will maintain a dovish policy stance if disinflation continues. Domestic data provided only limited support, pointing to modest manufacturing growth and a labor market that remains soft but is showing signs of stabilizing. These conditions are expected to keep the BoC on hold. Meanwhile, uncertainty surrounding negotiations to revise the USMCA continued to weigh on the economic outlook and reduced prospects for future rate hikes. The US dollar, however, remained under pressure at the turn of the month as weak US jobs data lowered expectations of a near-term Fed rate hike.

Canada’s 10-year government bond yield fell below 3.40% in late June, the lowest in over three months, as evidence of low underlying inflation backed expectations that the Bank of Canada will refrain from raising rates this year. Core inflation measures tracked by the Bank of Canada remained close to the central bank’s 2% target in May, despite a surge in energy prices during the period. The reading aligned with the BoC’s earlier view that the conflict in Iran may have only transitory effects on headline inflation. The BoC kept its key interest rate unchanged at 2.25% at its latest meeting and signaled that risks remain balanced across its inflation and employment mandate amid an uncertain economic backdrop. Meanwhile, the US Federal Reserve adopted a more hawkish tone at its latest meeting by projecting rate hikes by December. The shift prompted investors to scale back expectations for monetary easing, limiting declines in North American bond yields.