EUR/CAD rises to near 1.6100 due to hawkish ECB tone
- EUR/CAD advances as the Euro strengthens on a hawkish ECB stance.
- ECB’s Lagarde reiterated that policy will stay restrictive until inflation durably returns to the 2% target.
- The commodity-linked CAD weakens as WTI crude oil erases its intraday gains.
EUR/CAD gains ground as the Euro (EUR) receives support from the hawkish tone of the European Central Bank (ECB). The currency cross is trading around 1.6100 during the European hours on Tuesday. European Central Bank (ECB) President Christine Lagarde stressed that monetary policy will remain restrictive until inflation returns sustainably to the 2% target.
Germany’s S&P Global and HCOB Composite Purchasing Managers’ Index (PMI) slipped to a three-month low of 51.9 in March from 53.2 in February, with the slowdown driven entirely by the services sector. The Services PMI fell to 50.9 in March from 53.5 previously.
Phil Smith, Economics Associate Director at S&P Global Market Intelligence, stated that the Middle East conflict has dampened growth in the services sector. Smith noted that higher fuel prices and elevated uncertainty have weighed on spending, causing business activity growth to slow sharply to its weakest level in seven months in March.
Market participants will look for further direction from upcoming Eurozone Retail Sales and German inflation data later this week, which could provide additional insight into the ECB’s interest rate outlook for the year.
The EUR/CAD cross receives support as the commodity-linked Canadian Dollar (CAD) struggles, as the WTI price has lost its daily gains. It is worth noting that Canada is the largest crude oil exporter to the United States (US). West Texas Intermediate (WTI) oil price trades around $103.00 per barrel at the time of writing.
Traders prepared for US President Donald Trump’s approaching deadline for Iran to reopen the Strait of Hormuz. Trump had earlier warned that he could strike Iranian power plants and bridges if his demands are not fulfilled by 8:00 PM Eastern Time on Tuesday.
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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