The EUR/CAD cross trades in positive territory for the fourth consecutive day near 1.6460 during the early European session on Friday. The Euro (EUR) strengthens against the Canadian Dollar (CAD) as the political crisis in France eases. The European Central Bank (ECB) policymaker Joachim Nagel is set to speak later on Friday.
French Prime Minister Sébastien Lecornu has survived two no-confidence votes after separate motions were lodged against him amid continued political turmoil in the country. Lecornu’s survival gave France a moment to breathe after weeks of political crisis that plunged the country into deep uncertainty over its future and weighed on its economy. This, in turn, could underpin the EUR against the CAD in the near term.
On the other hand, a surprise gain in employment in September has dampened expectations for another rate cut by the Bank of Canada (BoC) in October, which might support the CAD and act as a headwind for the cross.
The Canadian central bank reduced its policy rate by 25 bps to 2.5% in September, the first cut since March. Money markets are now pricing in nearly a 50-55% odds of a 25 basis points (bps) reduction, down from around a 70% chance earlier this month.
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.
