• EUR/CAD rises ahead of the release of seasonally adjusted Eurozone Industrial Production data.
• The commodity-linked CAD struggles as US crude inventories surged by 7.14 million barrels, halting the recent rally in oil prices.
• Ongoing Middle East supply disruptions and Saudi pipeline closures could trigger a quick crude rebound.

EUR/CAD extends its gains for the second consecutive day, trading around 1.6090 during European hours on Wednesday. Traders are closely watching the European economic calendar, as the seasonally adjusted Eurozone Industrial Production figures for July are scheduled for release later in the day.

Markets push ECB path beyond a one-and-done hike

Rabobank’s strategists observe that investors are firmly pricing a sustained tightening cycle rather than a single move, noting that “markets expect much more than a one-and-done hike.” They add that this is consistent with “expectations embedded in curves where central banks have shown a more proactive response.” In particular, Rabobank highlights that as of yesterday, “EUR money markets priced more than four additional rate hikes on top of the two the ECB has already delivered,” underscoring how far market expectations have moved ahead of the current policy stance.

The EUR/CAD cross appreciated as the commodity-linked Canadian Dollar (CAD) struggled to maintain momentum following a pause in the recent rally of crude oil prices. Crude prices pulled back from multi-month highs after US inventory data revealed an unexpected build of 7.14 million barrels for the week ending September 11, reversing a 300,000-barrel draw recorded in the previous week.

Despite the recent inventory-driven pullbacks, crude oil prices could quickly find a floor and rebound due to expanding supply disruptions in the Middle East. Energy markets face renewed supply tightness after Saudi Arabia reportedly canceled several September crude deliveries to European buyers. The cancellations follow recent drone strikes that forced the emergency shutdown of Saudi Arabia's critical East-West pipeline.

Adding to the supply concerns, renewed attacks by Iran-backed Houthi militants in the region have left the operational status of the East-West pipeline uncertain. With no clear timeline for its reopening, markets remain vulnerable to further geopolitical friction, as the pipeline serves as a vital alternative shipping route to bypass the vulnerable Strait of Hormuz.

Canada inflation holds steady as RBC sees policy on hold

Economists at Royal Bank of Canada highlight that "Canadian inflation held at 3% year-over-year in August, unchanged from July," noting that the latest print underscores a still-elevated but stable price environment. Against this backdrop, they point out that headline pressures remain contained even as food and energy costs stay relatively high, reinforcing the view that underlying inflation dynamics are broadly consistent with the BoC’s 2% target over the medium term.

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.

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.