Euro declines against Canadian Dollar as oil prices rise
- EUR/CAD depreciates as higher oil prices, driven by US-Iran tensions, boost the commodity-linked Canadian Dollar.
- US CENTCOM launched new precision strikes on Iranian targets, emphasizing that over 50,000 American troops remain deployed regionally.
- MUFG analysts project the central bank will deliver an additional 25-basis-point rate hike at its upcoming September meeting.
EUR/CAD extends its losing streak for the third consecutive day, trading around 1.6070 during the European hours on Tuesday. The currency cross depreciates as the commodity-linked Canadian Dollar (CAD) gains ground on higher oil prices. Crude oil prices rise due to rising supply concerns, which could be attributed to the escalating United States (US)-Iran tensions.
US Central Command (CENTCOM) has executed fresh precision strikes against Iranian military targets, highlighting that more than 50,000 American troops remain deployed throughout the region.
Iran’s Islamic Revolutionary Guard Corps (IRGC) claimed responsibility for disabling two "offending supertankers" in the Strait of Hormuz. The IRGC alleged the vessels ignored maritime warnings and navigated through a mined route. Tehran has issued a stark warning that any cooperation with the US will prolong the closure of the strategic waterway and spark a global energy crisis.
Traders are closely watching for new signals on whether the European Central Bank (ECB) will implement further interest rate hikes later this year. The ECB raised its key policy rates during the June meeting. At that time, policymakers emphasized their commitment to a flexible, data-dependent approach for all future monetary policy decisions. MUFG analysts currently project that the central bank will deliver an additional 25-basis-point rate hike at its upcoming September meeting.
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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