Euro remains stronger against Canadian Dollar as oil prices ease

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EUR/CAD holds gains as the commodity-linked Canadian Dollar falters under pressure from lower oil prices.
WTI holds losses despite supply worries sparked by Trump's threat to resume military strikes on Iran.
The Euro may support as ECB official Martin Kocher called a June rate hike unavoidable if Hormuz remains closed.

EUR/CAD edges higher after posting modest losses in the previous day, trading around 1.5960 during the European hours on Wednesday. The currency cross holds ground as the commodity-linked Canadian Dollar (CAD) struggles amid lower oil prices. It is important to note that Canada is one of the world's largest oil producers and exporters, sending the vast majority of its supply to the United States (US); changes in oil prices impact Canada's export revenues and terms of trade.

West Texas Intermediate (WTI) oil price halts its four-day winning streak, hovering around $102.80 per barrel at the time of writing. However, Crude oil prices hold losses despite ongoing supply concerns following the latest threat from US President Donald Trump of resuming military strikes on Iran within two or three days to force a deal ending the war, following a brief pause after a new proposal from Tehran.

On Tuesday, Statistics Canada reported that the annual inflation rate accelerated to 2.8% in April from 2.4% in March, largely driven by higher gasoline prices. Despite the pickup, the reading came in below market forecasts of 3.1%. The monthly headline inflation rose by 0.4%, slowing down from the 0.9% increase seen in the previous month. Meanwhile, preferred measures of core inflation cooled, supporting the Bank of Canada’s (BoC) view that energy-driven price pressures may eventually fade, and easing broader market concerns over further domestic interest rate hikes.

The upside of the EUR/CAD cross could be limited as the Euro (EUR) may find some support from hawkish commentary from European Central Bank (ECB) policymakers. ECB Governing Council member Martin Kocher warned that a June rate hike is unavoidable if the Hormuz Strait remains closed, noting that a prolonged conflict will push eurozone inflation materially higher. Bundesbank President Joachim Nagel echoed this sentiment, stating that the ECB is moving away from its baseline scenario and hinting that action may be required in June.

According to a Reuters survey administered between May 8 and May 13, an overwhelming 85% majority of polled economists, specifically 59 out of 70 participants, forecast that the ECB will elevate its key deposit rate by 25 basis points, bringing it to a level of 2.25% during their upcoming June gathering. This consensus represents a dramatic surge in hawkish expectations when contrasted with the sentiment recorded just before the April policy meeting.

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.