EUR/CAD holds gains near 1.6050 as Euro advances on hawkish ECB tone

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EUR/CAD extends its gains for the third successive day, trading around 1.6040 during the European hours on Friday. The currency cross remains stronger as the Euro (EUR) remains firm against its major peers despite the decline in Germany’s industrial sector activity in March.

EUR/CAD remains firm as the Euro holds steady despite weaker German industrial activity data for March.
Germany’s Industrial Output fell 0.7% in March, missing forecasts and extending February’s revised 0.5% decline.
The commodity-linked Canadian Dollar may weaken amid lower oil prices.

Data released by Destatis on Friday showed that Germany’s seasonally adjusted Industrial Output declined 0.7% month-over-month (MoM) in March, missing expectations for a 0.5% increase and following February’s revised 0.5% drop. On an annual basis, German Industrial Production fell 2.8% YoY in March after posting a revised 0.2% decrease in February.

The Euro (EUR) stays supported amid hawkish commentary from European Central Bank (ECB) officials. ECB Executive Board member Isabel Schnabel said on Thursday that the central bank could raise interest rates as early as next month, warning that households and businesses are beginning to respond in a troubling manner to sharply rising global energy prices. Meanwhile, ECB board member Piero Cipollone stated on Wednesday that the likelihood of a rate hike has increased due to persistent inflation pressures, despite negotiated wage data indicating that pay demands have not yet accelerated.

The EUR/CAD cross may further appreciate as the commodity-linked Canadian Dollar (CAD) may decline amid lower oil prices. It is important to note that Canada is the largest crude oil exporter to the United States (US).

West Texas Intermediate (WTI) crude prices retreat after posting modest gains in the previous session, trading near $92.60 per barrel at the time of writing. Crude oil prices moved lower as easing tensions between the US and Iran reduced concerns over potential supply disruptions.

Oil prices had earlier advanced after renewed tensions flared between the United States (US) and Iran. The US military said it conducted retaliatory strikes on Iranian targets on Thursday, focusing on sites allegedly linked to attacks against US forces.

Bank of Canada FAQs

What is the Bank of Canada and how does it influence the Canadian Dollar?

The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.

What is Quantitative Easing (QE) and how does it affect the Canadian Dollar?

In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.

What is Quantitative tightening (QT) and how does it affect the Canadian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.