Canadian dollar holds near four-week high as yield spreads narrow

One major driver of inflation, and one of Canada's major exports, is oil. The U.S. price fell 0.4% to $79.30 a barrel but held near its highest level in a month on rising tensions in the Middle East.

In domestic data, housing starts fell 6% in June to 238,971 units on a seasonally adjusted annualized basis, falling short of the 257,900 that economists had projected.

U.S. Trade Representative Jamieson Greer said on Wednesday that formal trade talks with Mexico were progressing, while discussions with Canada had yet to produce concessions sought by President Donald Trump.

Canadian government bond yields moved higher across the curve. The 10-year CA10YT=RR was up 2.1 basis points at 3.552% but remained below the near two-month high of 3.596% it touched during Wednesday's session.

• The gap between Canada's 2-year yield and its U.S. equivalent has narrowed to 132 basis points in favor of the U.S. note from 142 basis points last month.
• The narrower spread has helped support the loonie against the U.S. dollar, said Amo Sahota, director at Klarity FX in San Francisco.
• "That’s been led by the softer inflation readings in the U.S. paring back Fed tightening expectations this year," Sahota said.
• The swap market has priced in one Federal Reserve rate hike by December, down from the two it was leaning toward in June.
• The Bank of Canada on Wednesday left its benchmark overnight rate unchanged at 2.25% as widely expected and said growth would strengthen in the second half of the year as inflation pressures eased.