EUR/CAD holds losses near 1.5950 as Euro losses outpace Canadian Dollar declines

EUR/CAD holds losses as the Euro weakens on safe-haven demand amid stalled US–Iran peace talks.
ECB is expected to keep its deposit rate at 2.0% on Thursday.
The Canadian Dollar may gain as oil rises with the Strait of Hormuz largely shut, tightening supply.

Akhtar Faruqui FXStreet

EUR/CAD depreciates for the second successive day, trading around 1.5960 during the European hours on Tuesday. The currency cross holds losses as the Euro (EUR) struggles on increased safe-haven demand amid stalled US-Iran peace talks.

Market participants expect the European Central Bank (ECB) to leave policy unchanged at Thursday’s meeting, maintaining its benchmark deposit rate at 2.0%, where it has remained since June last year.

ECB policymakers are likely to adopt a wait-and-see approach amid elevated economic uncertainty driven by the Middle East conflict. ECB official Martins Kazaks said last week that “we still have the luxury of collecting data and forming our view.”

The downside of the EUR/CAD cross could be restrained as the Canadian Dollar (CAD) also faces challenges due to increased risk aversion. However, the commodity-linked CAD may regain ground on higher oil prices, given Canada’s status as the largest crude exporter to the United States (US).

West Texas Intermediate (WTI) oil prices gained over 2% on Tuesday, trading around $96.90 per barrel at the time of writing. Crude oil prices rise as the critical Strait of Hormuz remains largely shut, tightening Middle East energy supplies.

US President Donald Trump seems unlikely to accept Iran's offer to end its closure of the Strait of Hormuz. Moreover, US Secretary of State Marco Rubio appeared to rule out any deal that excludes Iran’s nuclear program.

The Bank of Canada (BoC) is widely expected to hold rates steady at 2.25% on Wednesday. However, markets remain split on whether it will signal a potential hike or an extended pause for the rest of the year.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

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