Euro remains stronger against Canadian Dollar following Eurozone HICP inflation data
- Euro stays firm after Eurozone August HICP matches expectations at 0.4% MoM and 2.4% core YoY.
- Canadian Dollar weakens alongside falling crude oil prices as Middle East supply disruption fears ease.
- Saudi Arabia targets full restoration of its damaged East-West pipeline within six weeks.
EUR/CAD appreciates after posting modest losses in the previous day, trading around 1.6050 during the European hours on Thursday. The currency cross holds its ground, driven by a stronger Euro (EUR) following the release of the Eurozone Harmonized Index of Consumer Prices (HICP) data for August.
As expected, the monthly HICP rose 0.4% MoM, matching the previous period's increase. Annual inflation eased slightly to 3.2% compared to the expected 3.3% reading. Meanwhile, core monthly HICP held steady at a 0.2% gain, and the annual core reading met expectations at 2.4%, demonstrating consistent underlying price trends across the region.
Simultaneously, the EUR/CAD cross is gaining ground due to weakness in the commodity-linked Canadian Dollar (CAD), which has been dragged down by falling crude oil prices. Oil markets cooled following reports that Saudi Arabia expects to restore about half the capacity of its damaged East-West pipeline within days, with full operations targeted within six weeks. The pipeline serves as a critical bypass route around the vulnerable Strait of Hormuz following recent drone strikes on the infrastructure.
BoC seen edging toward late-year normalization as inflation concerns build
Strategists at Scotiabank highlight that the BoC’s stance remains notably supportive, stressing that “the Bank’s policy settings remain accommodative and concern about price pressures suggests a growing risk that the process of normalization may start late this year,” in line with Scotia’s long-held rate forecast.
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.