Euro weakens as Canadian Dollar receives support from higher oil prices
- EUR/CAD loses ground as the commodity-linked Canadian Dollar holds ground on higher oil prices.
- WTI may decline as Middle East tensions ease after President Trump paused a planned military strike on Iran.
- ECB's Yannis Stournaras stated a modest interest-rate increase could temper inflation without causing economic damage.
EUR/CAD pares its recent gains from the previous day, trading around 1.6000 during the European hours on Tuesday. The currency cross depreciates as the commodity-linked Canadian Dollar (CAD) holds ground against the Euro (EUR) due to higher oil prices. It is worth noting that Canada is the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) oil price extends its gains for the fourth consecutive day, trading around $102.20 per barrel at the time of writing. However, Crude oil prices may decline amid easing Middle East concerns after reports that United States President Donald Trump said on Monday that he has ordered a pause on a planned US military attack on Iran scheduled for Tuesday. This decision reportedly followed appeals from the leaders of Qatar, Saudi Arabia, and the United Arab Emirates. However, Trump also warned that the US remains prepared to go forward with a full, large-scale assault on Iran if a deal is not reached.
Canada’s March inflation data had already highlighted the impact of elevated energy prices on domestic consumer prices, keeping markets alert to renewed upside inflation risks. Canada’s annual inflation rate rose to 2.4%, matching the highest level in one year. Still, the Bank of Canada (BoC) signaled at its latest meeting that it does not see high risks of energy-driven inflation becoming entrenched and opted to leave interest rates unchanged.
The downside of the EUR/CAD cross could be restrained as the Euro (EUR) may gain ground due to hawkish comments from European Central Bank (ECB) policymakers. ECB Governing Council member Yannis Stournaras said over the weekend that a modest ECB interest-rate increase could temper inflation without causing economic damage.
The majority of economists from the Reuters poll, around 85%, indicated that the ECB would raise its deposit rate by 25 basis points (bps) to 2.25% in June, up from just over half expecting that before the April meeting.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.