EUR/CAD Gains as Soft Canadian Data and Crude Slump Drag CAD

Key Moments

EUR/CAD Holds Firm Despite Weak German Sentiment

EUR/CAD extended its advance for a second straight session, trading near 1.6110 during early European hours on Friday. The cross remained supported even as the Euro (EUR) absorbed a sharp deterioration in German consumer sentiment.

Germany’s GfK Consumer Confidence Survey dropped to -30.6 heading into October from a revised -26.8 in September, a deeper decline than the anticipated -27.4. This reading marked the lowest level since May, underscoring persistent pressure on household sentiment in Europe’s largest economy.

Mixed Euro Fundamentals and French Spread Concerns

Commentary from analysts at ING underscores that Euro-specific drivers are sending a mixed signal. They note that recent releases point to some underlying resilience in the Eurozone economy, but this has not translated into clear, sustained support for the common currency.

ING points out that “economic resilience (yesterday’s Ifo index mirrored strong PMIs) is at least partly being offset as a EUR-positive factor by wider eurozone spreads.” The bank highlights that “French 10-year yields are trading 110bp above bunds,” emphasizing that yield differentials remain a headwind. ING further flags that there has been “little relief from reports that Marine Le Pen may back the proposed budget to avert a bond crisis,” suggesting that political and fiscal uncertainty in France continues to weigh on Euro sentiment.

Canadian Dollar Pressured by Oil Weakness

The EUR/CAD cross also found support from softness in the commodity-linked Canadian Dollar (CAD), which came under pressure as crude oil prices declined. The retreat in oil followed reports that the United States and Iran are considering a phased agreement to reopen the Strait of Hormuz and lift the US blockade on Iranian ports.

These discussions, reportedly mediated by Qatari officials, were said to have been initiated on the sidelines of the United Nations General Assembly. The prospect of improved flows through a key maritime chokepoint weighed on crude benchmarks and, in turn, on the CAD.

Brent-WTI Divergence Widens

Analysts at UOB Group highlighted the relative weakness of US crude. They noted that “WTI crude settled at $94.61/bbl, down 5.67% on the week, reflecting the sharp midweek selloff that preceded Thursday’s partial recovery in Brent.”

They added that “the divergence between the two benchmarks widened significantly, with Brent’s premium over WTI increasing as the risk of supply disruptions through the Strait of Hormuz continued to support the international benchmark.”

Euro: Structure, Policy, and Market Drivers

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% of 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 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.

Broader Economic Indicators and Trade Balance

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.

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.