Euro surges against Canadian Dollar despite political uncertainty in France
- The Euro may face challenges amid ongoing political uncertainty in Europe, particularly in France.
- Stronger-than-expected inflation data across Eurozone economies fueled investor confidence in single-currency assets.
- The commodity-linked CAD may gain support as WTI oil price remains on track for a weekly gain of over 5%.
EUR/CAD extends its gains for the second successive day, trading around 1.5920 during hours on Friday. The upside of the currency cross could be restrained as the Euro (EUR) could struggle due to political uncertainty in Europe, particularly in France.
European Central Bank (ECB) President Christine Lagarde emphasized that France must address its national debt challenges through fiscal consolidation, dampening speculation that the ECB might intervene by purchasing French bonds to contain rising yields.
While Lagarde noted that energy-driven inflation has not yet spread to the broader euro-area economy, supporting a cautious policy stance, ECB policymaker Gediminas Šimkus asserted that a rate hike this month remains an option if necessary. Markets continue to price in another ECB rate increase in December.
Additionally, the commodity-linked Canadian Dollar (CAD) may gain support against its major peers, including the Euro, due to elevated oil prices. West Texas Intermediate (WTI) oil price remains on track for a weekly gain of over 5%, driven by intensifying supply disruption concerns across the Middle East.
The US Central Command confirmed that a Singapore-flagged container ship, which sank in the Strait of Hormuz earlier in the week, was struck by an Iranian projectile. This incident has raised further doubts about the restoration of physical oil flows and propelled tanker rates to record highs.
Energy Information Administration (EIA) data showed that US crude inventories plunged by 8.6 million barrels last week, marking the largest single-week draw since February. WTI was also positioned to outperform Brent for the week, bolstered by lower shipping costs for US crude that helped stimulate broader demand for American oil.
In geopolitical developments elsewhere, Yemen's Houthis launched a deadly missile and drone attack targeting the presidential palace in Aden, the Yemeni government's interim capital, as reported by the BBC on Thursday. The attack resulted in five deaths—including two members of Prime Minister Shaya Al-Zindani’s security detail- and left 16 others injured.
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.