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The Canadian dollar strengthened to a two-month high against its U.S. counterpart on Monday as investors bet that an agreement between the United States and Mexico to overhaul the NAFTA trade pact would lead to a trilateral deal that includes Canada.

U.S. President Donald Trump and outgoing Mexican President Enrique Pena Nieto said talks with Canada would begin immediately, though Trump threatened he could put tariffs on Canadian-made cars if a three-way deal could not be reached.

“CAD rallied based on the premise that Canada will come to an agreement with the United States later this week,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets.

Canada sends about 75 per cent of its exports to the United States so its economy could benefit if talks with the United States and Mexico lead to a trilateral trade deal.

“The trade relationship between Canada and the U.S. is so intertwined that it’s tough (for Trump) to be too punitive on Canadian products,” said Matt Skipp, president of SW8 Asset Management.

Shares of Canadian auto-parts producers were higher, with Linamar Corp up 6.3 percent, Martinrea International Inc climbing 5.7 percent and Magna International Inc. up 4.3 percent.

The Canadian dollar was trading 0.5 percent higher at $1.2964 to the greenback, or 77.14 U.S. cents. The currency touched its strongest since June 14 at $1.2952.

Gains for the loonie came despite Bank of Canada Governor Stephen Poloz playing down on Friday the recent jump in inflation. The rise in inflation to a nearly seven-year high of 3 percent in July was due to transitory factors, Poloz said in an interview in Jackson Hole, Wyo.

The price of oil, one of Canada’s major exports, was supported by a strengthening equities market and news of the trade deal between the U.S. and Mexico.

U.S. crude oil futures settled 0.2 percent higher at US$68.87 a barrel.

Canadian government bond prices were lower across a steeper yield curve, with the two-year down 3.5 cents to yield 2.139 percent and the 10-year falling 33 cents to yield 2.298 percent.

The gap between Canada’s 10-year yield and its U.S. equivalent narrowed by 1.7 basis points to a spread of 55.0 basis points in favour of the U.S. bond, its smallest gap since May 22.

Canada’s gross domestic product data for the second quarter is due on Thursday.

This content appears as provided to The Globe by the originating wire service. It has not been edited by Globe staff.

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