Euro holds gains against Canadian Dollar amid lower oil prices
- EUR/CAD stays strong as the Canadian Dollar struggles due to falling oil prices.
- Crude declines on Middle East peace hopes, alongside upcoming high-level UN diplomatic meetings.
- ECB President Christine Lagarde noted rate decisions will happen meeting-by-meeting, ruling out cuts soon.
EUR/CAD extends its gains for the third successive day, trading around 1.6090 during the European hours on Monday. The currency cross remains stronger as the commodity-linked Canadian Dollar (CAD) struggles amid lower oil prices.
Crude oil prices are declining due to growing hopes that increased diplomatic efforts could help end the Middle East conflict and restore stable energy flows from the region. Adding to this diplomatic momentum, US President Donald Trump stated he would "probably" be open to meeting Iranian President Masoud Pezeshkian on the sidelines of the United Nations General Assembly in New York this week. Alongside this potential encounter, Trump may meet with other Persian Gulf leaders and is scheduled to hold a summit with Chinese President Xi Jinping.
Meanwhile, European Central Bank (ECB) President Christine Lagarde said that any further interest rate hike by the ECB "will depend on the future." She added that the central bank would decide "meeting by meeting" what is appropriate, whether that is to hold, increase, or cut interest rates, although cutting rates "is very unlikely at the moment."
The FXS Speechtracker score of 4.4/10, below Lagarde’s historic 5.7/10 average, signals a slightly more dovish tone despite the comment that growth is “a bit more promising than we thought.” The pledge to decide on rates meeting by meeting underscores data dependence, while the remark that second-round effects are not yet visible reduces urgency for imminent tightening and tempers Euro upside.
Overall, the speech leans mildly dovish relative to Lagarde’s usual stance, as the absence of clear second-round effects suggests less pressure to hike aggressively. For FX markets, this mix of cautious optimism on growth and a patient policy stance is likely to keep the Euro range-bound, with traders awaiting stronger evidence on inflation dynamics before repricing the ECB path.
Euro inflation expectations edge higher in ECB survey
Economists at Deutsche Bank point out that, in the Euro area, "inflation expectations in the ECB's consumer survey were slightly higher in August," underscoring a modest firming in household price expectations after recent declines.
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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