EUR/CAD edges higher above 1.6100 ahead of Canadian employment data
- EUR/CAD trades marginally higher around 1.6110 ahead of key Canadian labor market data for August.
- The Unemployment Rate is seen rising to 7%.
- Economists expect the ECB to hold interest rates steady in the policy meeting next week.
The EUR/CAD pair extends its winning streak for the third trading day on Friday, and trades marginally higher to near 1.6115 during the late Asian trading session. The pair ticks up ahead of the Canadian labor market data for August, which will be published at 12:30 GMT.
The Canadian labor market report is expected to show that employers hired 7.5K fresh workers. In July, the labor force was reduced 40.8K. The Unemployment Rate is estimated to have increased to 7%, the highest level seen since October 2021.
Signs of further slowdown in the Canadian job market would prompt market expectations for further interest rate cuts by the Bank of Canada (BoC). In last three monetary policy meetings, the BoC has kept interest rates steady at 2.75%.
In the September’s policy meeting, the BoC is expected to cut interest rates by 25 basis points (bps) to 2.5%, according to a report from Reuters.
Meanwhile, the Euro (EUR) trades broadly calm as investors expect that the European Central Bank (ECB) is unlikely to cut interest rates in the monetary policy meeting next week. A Reuters poll on September 1-4 showed that almost all economists predicted that the ECB will not reduce interest rates in the September policy meeting. The report showed that inflation in the Eurozone economy is almost in control and its economic outlook is steady.
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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