EUR/CAD Gains as German Surplus Rises, Oil Slips

Key Moments

Euro Advances on Robust German Trade Data

EUR/CAD moved higher during European trading on Thursday, with the pair changing hands near 1.6210 after two consecutive days of losses. The recovery in the cross was supported by stronger-than-expected trade figures out of Germany.

Germany’s trade surplus widened to €19.1 billion in May, its largest reading since February. This outcome exceeded market expectations of €14.8 billion and followed an upwardly revised surplus of €14.7 billion in April.

The improvement in the trade balance was driven by a surprise 0.9% month-on-month increase in exports, reaching a three-and-a-half-year high and defying projections for a 0.3% decline. At the same time, imports fell 2.5% to a three-month low, missing estimates for a 0.1% gain and reversing April’s 1.1% rise.

Weak Oil Prices Weigh on Canadian Dollar

The EUR/CAD cross also drew support from softness in the Canadian Dollar, which tends to be sensitive to commodity price movements. The currency weakened alongside a decline in crude oil, with West Texas Intermediate slipping below $73.00 per barrel at the time of writing.

However, the current downward move in oil could prove short-lived amid rising geopolitical risks. For a second straight day, the United States and Iran exchanged military strikes tied to control of the Strait of Hormuz. According to official state news agency IRNA, the latest American strikes in western Iran resulted in three fatalities and left several others injured.

Key German Trade Figures

Euro: Structure, Drivers, and Key Metrics

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.

EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

Role of the European Central Bank

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.

The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.

The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Impact of Inflation and Economic Data on the Euro

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.

Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.

A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.

Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Trade Balance as a Currency Driver

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.

If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.