EUR/CAD steadies below 1.6050 as improved oil prices lift Canadian Dollar

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EUR/CAD extends its losing streak for the sixth consecutive day, trading around 1.6040 during the European hours on Wednesday.

EUR/CAD holds losses as the Canadian Dollar gains on improved oil prices.
Maritime authorities said an IRGC-linked gunboat fired on a Liberia-flagged vessel and two other cargo ships.
ECB’s Lagarde warns Eurozone outlook is highly uncertain due to a significant energy supply shock.

EUR/CAD extends its losing streak for the sixth consecutive day, trading around 1.6040 during the European hours on Wednesday. The currency cross stays subdued as the Canadian Dollar (CAD) draws support from a stronger risk-on mood after US President Donald Trump extended the ceasefire despite the collapse of second-round US–Iran talks.

Moreover, the commodity-linked CAD is further supported by firmer oil prices amid renewed attacks on shipping near Iran. Maritime authorities reported that a Liberia-flagged container vessel was fired upon by a gunboat linked to Iran’s Islamic Revolutionary Guard Corps, while two additional outbound cargo ships were also targeted.

However, a Bloomberg headline, citing Tasnim News Agency affiliated with the IRGC, noted that Iran has received “some sign” the United States (US) may be willing to ease its naval blockade.

The Canadian Dollar may continue to gain as rising energy prices could boost foreign exchange inflows into Canada’s financial system, reflecting the country’s status as the largest crude exporter to the United States. Higher energy costs could also lift inflation, potentially prompting the Bank of Canada (BoC) to signal a firm stance against persistent price pressures, further underpinning the currency.

European Central Bank (ECB) President Christine Lagarde warned that the Eurozone outlook remains highly uncertain due to a significant energy supply shock tied to Middle East tensions and the Strait of Hormuz blockade. While energy prices have yet to reach worst-case levels, she stressed that the outlook remains fragile.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.