The EUR/CAD pair continues its gains for the second session in a row, trading around the 1.6210 level during European hours on Monday. The currency pair advanced as the euro received support from signs that the European Central Bank (ECB) is nearing the end of its interest rate cutting cycle.
Headline inflation in the euro zone slowed to 2.0% in December, its lowest level in four months and in line with the European Central Bank’s target, while core inflation fell to 2.3%, coming in slightly below expectations. The decline in inflation supports policymakers’ view that the European Central Bank may keep interest rates at current levels unless the economic outlook changes significantly.
Traders are also cautious as European countries led by the UK and Germany discuss strengthening their military presence in Greenland to enhance security in the Arctic. Germany may propose a joint NATO mission, while British Prime Minister Keir Starmer urged allies to step up efforts in the far north, amid renewed comments by US President Donald Trump calling for US ownership of Greenland.
The upside for EUR/CAD may be limited as the commodity-linked Canadian dollar receives support from higher oil prices. The price of West Texas Intermediate crude oil rises as supply risks increase amid escalating protests in Iran. The country exports nearly two million barrels per day and is the fourth largest producer in OPEC, making any escalation a material threat to global supplies.
Employment rates in Canada rose by just 8,000 in December after a strong increase of 181,000 over the previous three months. The unemployment rate rose to 6.8% from 6.5%, mainly reflecting a greater proportion of people entering the labor market rather than increased layoffs.
The data does not point to a setback, said Claire Vann, chief economist at the Royal Bank of Canada (RBC), noting that modest job increases and higher unemployment rates support the view that Canada’s labor market recovery is underway but is likely to remain uneven, with the recession gradually absorbed over time.
Frequently asked questions about the Canadian dollar
The main factors that move 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 moving into riskier assets (risk on) or looking for safe havens (risk off) – with risk being positive for the Canadian dollar. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The Bank of Canada’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD negative and the latter positive.
The price of oil is a major factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. In general, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has always been thought to be a negative factor for a currency because it reduces the value of money, the opposite is the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital flows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing PMIs, services, employment and consumer surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, the Canadian dollar will likely fall.
