EUR/CAD struggles near 1.5850 as oil prices support Canadian Dollar
- EUR/CAD’s upside remains limited as the commodity-linked CAD receives support from higher oil prices.
- WTI eases intraday but remains elevated on Middle East supply concerns.
- Policymakers flagged inflation upside and growth downside risks, boosting bets on ECB rate hikes this year.
EUR/CAD rebounds after opening with a gap lower, trading near 1.5830 during the Asian session on Monday. However, gains remain limited as the commodity-linked Canadian Dollar (CAD) draws support from rising oil prices, reflecting Canada’s position as the largest crude exporter to the United States (US).
Meanwhile, West Texas Intermediate (WTI) oil price trims intraday gains but stays elevated around $97.80 per barrel at the time of writing. Crude oil prices continue to be underpinned by supply concerns amid ongoing tensions in the Middle East.
US President Donald Trump has reportedly issued Iran a 48-hour ultimatum to reopen the Strait of Hormuz or face potential strikes on its energy infrastructure. In response, Iran’s Islamic Revolutionary Guard Corps (IRGC) warned it would fully shut the strait if the US proceeds. Separately, reports suggest Washington is weighing a possible ground operation to seize Iran’s Kharg Island, a key oil export hub.
On the monetary policy front, the European Central Bank (ECB) left interest rates unchanged at its latest meeting last week, citing that the conflict in Iran has made the outlook “significantly more uncertain.” Policymakers highlighted “upside risks to inflation and downside risks to growth,” leading traders to increase bets on potential ECB rate hikes later this year. ECB officials are due to speak later on Monday, and any hawkish signals could provide additional support to the Euro against its major counterparts.
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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