EUR/CAD holds positive ground above 1.6350 on lower oil prices, downbeat Canadian data
- EUR/CAD extends the decline to near 1.6370 in Friday’s early European session.
- Oil prices slide ahead of the OPEC+ meeting over the weekend, weighing on the Canadian Dollar.
- ECB’s Kazaks said he sees rates staying at 2% if no further shocks.
The EUR/CAD cross extends the rally to around 1.6370 during the early European trading hours on Friday. The fall in crude oil prices undermines the commodity-linked Canadian Dollar (CAD) against the Euro (EUR). The European Central Bank (ECB) President Christine Lagarde is scheduled to speak later on Friday.
Oil prices, one of Canada's major exports, fall to near the lowest in four months amid concerns about oversupply in the market ahead of a meeting of the Organization of the Petroleum Exporting Countries and allies (OPEC+) over the weekend. "It's no surprise the Canadian dollar has broken down on the same day as oil," said Adam Button, chief currency analyst at investingLive. "The market is clearly scared of what's happening with OPEC,” added Button.
The downbeat Canadian economic data contributes to the CAD’s downside as it adds to some expectations of another rate cut by the Bank of Canada (BoC). Canada’s S&P Global Manufacturing Purchasing Managers’ Index (PMI) declined to 47.7 in September from 48.3 in August. This report signalled a continued contraction in factory activity and marked the eighth straight month of decline in the manufacturing sector.
On the Euro front, ECB President Christine Lagarde stated there are no serious threats to the outlook for euro-area inflation but that officials must remain vigilant. Meanwhile, ECB Governing Council member Martins Kazaks noted on Thursday that the central bank can keep interest rates where they are unless the economy suffers another shock.
The cautious remarks from ECB policymakers support the shared currency against the CAD in the near term. Financial investors are so comfortable with this outlook that they price just a 10% odds of another rate reduction later this year and see only a 30% chance of an easing by the middle of 2026. However, any surprise dovish comments from ECB officials later on Friday might cap the upside for the cross.
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.
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