EUR/CAD climbs above 1.6200 as ECB holds rates
- EUR/CAD rises as expectations grow that the ECB will keep rates unchanged barring a major outlook shift.
- Traders turn cautious as UK- and Germany-led talks consider boosting military presence in Greenland.
- The commodity-linked CAD could gain as the WTI price rises on supply risks from escalating Iran protests.
EUR/CAD extends its gains for the second successive session, trading around 1.6210 during the European hours on Monday. The currency cross advances as the Euro (EUR) gains support from signs that the European Central Bank (ECB) is nearing the end of its rate-cutting cycle.
Eurozone headline inflation slowed to 2.0% in December, a four-month low and in line with the ECB’s target, while core inflation eased to 2.3%, coming in slightly below forecasts. Easing inflation supports the view of policymakers that the European Central Bank (ECB) may keep interest rates at current levels unless the economic outlook changes significantly.
Traders also adopt caution as European nations led by the United Kingdom (UK) and Germany are discussing boosting their military presence in Greenland to reinforce Arctic security. Germany may propose a joint NATO mission, while UK Prime Minister Keir Starmer has urged allies to step up efforts in the High North, amid renewed comments by US President Donald Trump advocating US ownership of Greenland.
The upside of the EUR/CAD cross could be limited as commodity-linked Canadian Dollar (CAD) receives support from higher Oil prices. WTI price rises as supply risks grow amid escalating protests in Iran. The country exports nearly 2 million barrels per day (bpd) and is OPEC’s fourth-largest producer, making any escalation a material threat to global supply.
Canada’s Employment rose by just 8,000 in December after a strong 181,000 increase over the previous three months. The unemployment rate climbed to 6.8% from 6.5%, mainly reflecting a larger share of people entering the labor force rather than increased layoffs.
Royal Bank of Canada (RBC) Senior Economist Claire Fan said the data do not signal a setback, noting that the modest job gain and higher unemployment support the view that Canada’s labor market recovery is underway but likely to remain uneven, with slack absorbed gradually over time.
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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