EUR/CAD holds gains above 1.6050 as oil prices eases
- EUR/CAD holds gains as the commodity-linked Canadian Dollar struggles, pressured by softer oil prices.
- WTI eased amid reports of US, Iran, and mediators discussing a potential 45-day ceasefire.
- Traders expect the ECB to keep policy restrictive until inflation sustainably returns to the 2% target.
EUR/CAD moves little for the second consecutive trading day, trading around 1.6070 during the early European hours on Monday. However, the currency cross remains in the positive territory as the commodity-linked Canadian Dollar (CAD) struggles amid easing oil prices, given Canada’s status as the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) oil price edges lower after registering over 10% gains in the previous day, trading around $102.80 per barrel at the time of writing. Crude oil prices eased after reports that the United States (US), Iran, and regional mediators are discussing terms for a potential 45-day ceasefire. However, the downside of the oil prices could be restrained as the unnamed sources see low chances of a deal being reached within the next 48 hours, a report from Axios cited by Bloomberg.
US President Donald Trump renewed pressure on Iran to reopen the Strait of Hormuz, a vital global oil route, warning that failure to comply by Tuesday could trigger strikes on key infrastructure, including power plants and bridges.
Moreover, the EUR/CAD cross may gain ground as the Euro (EUR) remains stronger amid the hawkish stance surrounding the European Central Bank (ECB) policy outlook. ECB President Christine Lagarde and other policymakers have reiterated that policy will remain restrictive until inflation sustainably returns to the 2% target.
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
