Loonie Surges on Higher Inflation and Bond Demand

Canada's dollar surged to a two-month high after July inflation rose to 3%, surpassing forecasts of 2.9%. The increase was largely driven by higher gasoline prices, but underlying measures remained relatively calm.

The split between headline and core inflation is crucial, as it can influence short-term interest rate expectations without necessarily signaling broad-based price pressure. Meanwhile, Canadian government bond yields have been rising, with the 10-year yield increasing by about 17 basis points over the past month.

Foreign investors' demand for Canadian assets also played a significant role in the loonie's appreciation. In June, foreign investors bought a net $40.83 billion of Canadian securities, primarily federal government bonds, which typically require Canadian dollars to settle.