Euro falls against Canadian Dollar amid French debt fears, oil rally
- Euro struggles due to French Budget concerns and a severe bond selloff, spiking Eurozone debt crisis fears.
- Germany’s August exports fell 0.8%, narrowing the Trade Surplus down to €19.5 billion.
- Middle East tensions and Gulf storm disruptions boost the commodity-linked Canadian Dollar.
EUR/CAD continues its losing streak for the fourth successive day, trading around 1.5940 during European hours on Thursday. The currency cross has depreciated as the Euro (EUR) faces ongoing pressure driven by fiscal instability in France and broader contagion fears across the Eurozone.
Concerns over Paris's ability to rein in its budget deficit triggered a sharp bond market selloff, driving the risk premium on French government debt to its highest level since the Eurozone debt crisis. As investors shed French bonds in favor of safer German bunds, French Prime Minister Sébastien Lecornu's minority government announced a €54bn savings package last month to avert a catastrophic credit downgrade or sovereign default.
Adding to the Euro's headwinds, Germany’s Trade Surplus narrowed to €19.5 billion in August from a revised two-and-a-half-year high of €21.6 billion in July, though it slightly topped market expectations of €19 billion. The narrowing was driven by an unexpected 0.8% month-on-month drop in exports, defying forecasts for a 0.8% increase, alongside a 0.9% rebound in imports following a steep decline in the prior month.
Meanwhile, the EUR/CAD cross remains under pressure as the commodity-linked Canadian Dollar (CAD) benefits from a surge in global crude oil prices. Energy markets rallied on reports that the Trump administration directed the Pentagon to draft military strike options against Iran ahead of the US midterm elections, confounding expectations of a pre-election de-escalation.
Oil prices received further upward momentum from supply disruptions in the Gulf of Mexico caused by Tropical Storm Isaias. Offshore producers were forced to shut in over 510,000 barrels per day of crude production, taking approximately a quarter of the region’s total output offline and offering additional support to the CAD.
Canada faces rising political fragmentation as separatist risks resurface
Analysts at Rabobank highlight growing political strains in Canada, noting that “the separatist Parti Québécois won around 30 percent of the vote in Monday’s provincial election, gaining 59 of 127 seats—just shy of a majority but enough to form a minority government.” They add that the picture is complicated further by developments in the west, where “Alberta will vote on its own independence (or at least, the process to start considering independence) from Canada on October 19,” underscoring a rise in regional fragmentation that could add to the country’s political risk profile.
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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