EUR/CAD extends upside above 1.6350 as Canadian PMI supports BoC rate cut bets

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The EUR/CAD cross extends the rally to around 1.6360 during the early European session on Thursday. The Canadian Dollar (CAD) weakens against the Euro (EUR) as Canadian economic data showed a deeper downturn in the manufacturing sector.

EUR/CAD gains momentum to near 1.6360 in Thursday’s early European session.
Canadian Manufacturing PMI fell to 47.7 in September.
ECB’s Lagarde said there are no significant threats to the euro-area inflation outlook but stressed the importance of remaining vigilant.

Data released by S&P Global showed that Canada’s S&P Global Manufacturing PMI declined to 47.7 in September from 48.3 in August, signaling a continued contraction in factory activity. This marked the eighth straight month of decline in the manufacturing sector, which dragged the CAD lower and created a tailwind for the pair.

"Softer PMI data in Canada added to some expectations of another cut by the BoC," said Jayati Bharadwaj, a global FX strategist at TD Securities.

The European Central Bank (ECB) President Christine Lagarde said there are no serious threats to the outlook for euro-area inflation but that officials must remain vigilant. Her remarks indicated that the ECB is in no rush to lower borrowing costs further. This, in turn, supports the shared currency against the CAD.

Eurostat published the Eurozone Harmonized Index of Consumer Prices (HICP) report on Wednesday, with annual inflation rising to 2.2% in September, as expected, compared to a 2% increase in August. The core HICP climbed 2.3% YoY in the same period, as expected. Meanwhile, the Eurozone’s HICP inflation steadied at 0.1% MoM, matching August’s reading. Core HICP increased 0.1% MoM, versus 0.3% prior.

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.

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