EUR/CAD falls toward 1.5900 as risk aversion weighs on Euro
- EUR/CAD declines as the Euro weakens amid rising risk aversion tied to Middle East geopolitical tensions.
- Trump said the Iran port blockade will continue, raising concerns the Strait of Hormuz may remain closed.
- The commodity-linked Canadian Dollar gains support from rising oil prices.
EUR/CAD extends its losses for the third consecutive day, trading around 1.5920 during the Asian hours on Friday. The currency cross loses ground as the Euro (EUR) struggles amid increased risk aversion, which could be attributed to the geopolitical concerns in the Middle East.
On Thursday, US President Donald Trump stated he would continue the naval blockade of Iranian ports, amid concerns that the strategically important Strait of Hormuz may not reopen in the near term. Trump also criticized congressional efforts aimed at restricting his war powers, including a recent Senate proposal that was rejected earlier in the day, per Bloomberg.
Iran’s Supreme Leader Mojtaba Khamenei further dimmed prospects for a deal, vowing not to give up the Islamic Republic’s nuclear or missile capabilities and signaling that Tehran would maintain control over the strait.
European Central Bank (ECB) left interest rates unchanged at its April meeting held on Thursday. The governing council kept the deposit rate at 2% despite rising Eurozone inflation amid the Iran conflict, stating that while the outlook remains broadly unchanged, upside risks to inflation and downside risks to growth have increased.
The EUR/CAD cross remains subdued as the commodity-linked Canadian Dollar (CAD) receives support from higher oil prices. However, West Texas Intermediate (WTI) oil price opened at a bearish gap, gained ground but still remaining in the negative territory and trading around $102.40 per barrel at the time of writing. Crude oil prices are set for a second weekly gain, amid dimming prospects for a US-Iran peace deal and expectations that the Strait of Hormuz would not reopen anytime soon.
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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