EUR/CAD, or euro to Canadian dollar, is a fairly lightly traded currency pair. Both currencies tend to strengthen when global growth is accelerating while weakening during downturns. Thus the biggest moves in the pair have occurred when there is a unique event unfolding in either the Eurozone or in Canada specifically. For example, EUR/CAD sold off sharply in 2010 as the Eurozone was mired in a debt crisis while Canada benefited from rising crude oil prices.
The euro is currently recovering against the US dollar, Japanese yen and Canadian dollar, while selling off against the Australian dollar. Yesterday, the euro sold off sharply against the US dollar. Notably, trading volumes in euro futures accelerated for the third session in a row. The combination of yesterday's weakness and rising volumes suggests that traders are selling the currency with conviction. Today's EUR/USD trading range is 1.1430 - 1.1860.
Following news that the European Commission called Italy's draft budget an "unprecedented" breach of Eurozone fiscal rules, the euro weakened sharply yesterday. According to a Reuters report, the Commission stated that Italian government spending was too high, the structural deficit was likely to rise and that Italian public debt would not fall in line with the EU's rules. ECB President Mario Draghi has also weighed in on Italy's fiscal budget, stating that undermining the rules carry a high price for all members of the monetary union. Looking at reactions in markets, 10-year Italian government bonds (BTPs) sold off sharply yesterday and continue to sell off today. 10-year BTPs are currently yielding 3.7% today. Note that bond prices move lower as bond yields rise. While today's BTP sell-off is having a more limited impact on the euro, the common currency is likely to remain under pressure as Eurozone growth continues to slow in rate-of-change terms.
Looking beyond bond markets, the latest developments from Italy are also tempering rate hike expectations. While investors expected the European Central Bank to raise rates by 10 basis points (0.10%) in September 2019, this is no longer the case today. While ECB speakers remain optimistic for future growth in the region, markets appear to be taking a different view. Our outlook on the euro remains bearish.
EUR/USD is up slightly and trading above 1.1460. The euro is up against the yen, with EUR/JPY trading above 128.80. Finally, the euro is flat against the pound, with EUR/GBP above 0.8790.
|October 15||Bundesbank Beermann Speech|
|October 15||ECB Nouy Speech|
|October 16||Germany Import Prices YoY AUG||4.8%||4.8%|
|October 16||Eurozone Balance of Trade AUG||€11.7B||€17.6B|
|October 16||Eurozone ZEW Economic Sentiment Index OCT||-19.4||-7.2|
|October 16||Germany ZEW Current Conditions OCT||70.1||76|
|October 16||Germany ZEW Economic Sentiment Index OCT||-24.7||-10.6|
|October 17||Eurozone Construction Output YoY AUG||2.5%||2.2%|
|October 17||Eurozone Core Inflation Rate YoY Final SEP||0.9%||0.9%|
|October 17||Eurozone Inflation Rate YoY Final SEP||2.1%||2%|
|October 17||Bundesbank Weidmann Speech|
|October 18||Germany Wholesale Prices YoY SEP||3.5%||3.8%|
|October 19||Eurozone Current Account AUG||€20.5B||€30B|
The Canadian dollar is currently selling off against all major currencies except the Japanese yen. Yesterday, the loonie ended the day sharply lower against the US dollar. For the third session in a row, trading volumes in Canadian dollar futures accelerated relative to the previous session. The combination of recent weakness and rising volumes suggests that traders are selling the loonie with conviction. Today's USD/CAD trading range is 1.2770 - 1.3120.
Following a significant slowdown in year-over-year inflation, the Canadian dollar sold off sharply earlier today. Looking at the figures, headline inflation in September slowed to 2.2%, versus 2.8% in August. Consensus estimates had also called for significantly higher inflation in September. Ahead of next week's Bank of Canada interest rate decision, the significant slowdown in inflation (from its recent peak at 3% two months ago) is a serious concern for Canadian dollar traders. Beyond the recent slowdown, inflation is likely to keep slowing thanks to steepening base effects. In other words, rising inflation at this point last year makes a continued acceleration in year-over-year inflation mathematically more challenging. All else held equal, falling inflation lowers rate hike expectations, in turn weighing on the Canadian dollar.
While September retail sales figures (also announced earlier today) beat the previous monthly figures, note that August retail sales numbers were revised lower. As consumption is a significant proportion of Canada's overall economy, retail sales have a significant impact on the outlook for growth. As retail sales growth has been decelerating in rate-of-change terms this year, it follows that the outlook for Canadian growth is weakening accordingly. Our outlook on the Canadian dollar remains bearish.
The USD/CAD exchange rate is currently above 1.3110. The euro is up against the Canadian dollar, with EUR/CAD currently above 1.510. The pound is up against the Canadian dollar, with GBP/CAD trading above 1.710. CAD/JPY is flat, and currently trading above 85.70.
|October 15||New Motor Vehicle Sales AUG||185.2K||179.6K|
|October 15||BoC Business Outlook Survey|
|October 16||Foreign Securities Purchases AUG||C$2.82B||C$15.29B|
|October 16||Foreign Securities Purchases by Canadians AUG||C$-0.19B||C$13.06B|
|October 17||Manufacturing Sales MoM AUG||-0.4%||0.9%|
|October 18||ADP Employment Change SEP||28.8K||42.7K|
|October 19||Core Inflation Rate YoY SEP||1.5%||1.7%|
|October 19||Inflation Rate YoY SEP||2.2%||2.8%|
|October 19||Retail Sales YoY AUG||3.6%||3.5%|
In our last commentary on the euro in late August, we wrote that the common currency was set to weaken further thanks to (1) slowing growth, (2) slowing inflation and (3) an outsized speculator long position in euro futures and options. Following the publication of our last commentary, EUR/USD has weakened from 1.1730 – 1.180 (the top-end of its trading range that we update daily on our...
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Significance of the EUR/CAD pair
The euro is the second most traded currency in the world after the US dollar. During economic booms, the euro tends to strengthen at a gradual pace. On the other hand, the common currency has historically sold off sharply during times of peril. Meanwhile, the Canadian dollar is usually seen as a proxy for crude oil strength. The currency tends to strengthen during crude oil bull markets and weakens when crude oil prices fall. At a high level, this means that the euro to Canadian dollar exchange rate tend to move in the same direction. The biggest moves have occurred when one of the currency pairs is undergoing a significant episode of strengthening or weakening. Since 2000, EUR/CAD has traded in a range between 1.21 and 1.75. Relative GDP growth rates for Canada and the Eurozone are shown below:
1999 – 2001: early days of EUR/CAD
When the euro was first launched in 1999, it began life as a digital currency. At the time, physical banknotes and coins did not exist. The common currency immediately began weakening, and this weighed on EUR/CAD despite overall weakness in the Canadian dollar at the time. Between 2000 and 2002, the Canadian dollar suffered thanks to weakness in crude oil prices and slow GDP growth. Looking at EUR/CAD, while the pair started the year around 1.80, it had fallen to around 1.51 by the beginning of 2000.
By late 2001, EUR/CAD had strengthened beyond 1.40, mostly as a function of increased confidence in the euro and continuing weakness in the Canadian dollar. The Canadian dollar was weak at the time thanks to low crude oil prices and the impact from the technology and telecom stock market bubble in 2000. The pair made bigger gains once physical banknotes and coins were introduced in 2002, and major Eurozone countries such as Germany officially switched to using only euros. By the end of 2002, EUR/CAD had strengthened to around 1.64.
2002 – 2004: The early 2000s
Between mid-2002 and 2004, EUR/CAD traded in a range between 1.50 and 1.70. During this era, global GDP growth accelerated following the downturn that began in 2000. Both Canadian and Eurozone GDP growth also did well during this era. The Eurozone turned a corner in 2004, when growth accelerated to 2.3% from 0.7% in 2003. In Canada’s case, the country’s GDP growth had accelerated to 3% by 2004. At the end of 2004, EUR/CAD was trading close to 1.60.
2005: Eurozone jitters
Starting in early 2005, the euro began weakening broadly as GDP growth reversed. Growth in the Eurozone’s largest economies (Germany, France and Italy) slowed in early 2005 as Eurozone unemployment and government budget deficits ballooned. As markets lost interest in the Eurozone and chased relatively higher growth outside the region, the euro weakened as a result. On the other hand, the Canadian dollar began strengthening during this time thanks to accelerating crude oil prices. Looking at EUR/CAD, the exchange rate had weakened down to around 1.41 by September 2006.
2006 – 2007: the pre-financial crisis rally
In late 2006, both the euro and the Canadian dollar began rallying in earnest. The US dollar sold off sharply during this time, as poor economic data led to weakness in the US dollar. Early problems in the housing market were also causing concerns, as many believed that US house prices had strengthened too quickly. By comparison, both the Eurozone and Canada were doing well in 2007. Looking at the Euro area, the region’s largest economies (and Germany in particular) were booming thanks to exports focused on peripheral Eurozone countries. In Canada, accelerating demand for commodities from Asia helped the economy. As Eurozone GDP growth overtook Canadian growth for the first time in the 2000s, EUR/CAD peaked above 1.56 in March 2007.
The Canadian dollar rally accelerated shortly thereafter as crude oil prices strengthened beyond $90 a barrel. EUR/CAD rapidly weakened to around 1.35 by October 2007.
2008 – 2009: the global financial crisis
In early 2008, many believed that problems in the US housing sector would be confined to the US. As such, the euro was seen as a safe haven and rallied during this time. EUR/CAD was back above 1.60 by March 2008.
For currency markets, the real impact of the global financial crisis was felt in September 2008. Many global financial institutions were at risk of outright collapse (following the bankruptcy of Lehman Brothers), while markets feared for the worst. The US dollar shot up in value at this time as banks were unable to roll over their US dollar liabilities. For a broader description of how offshore US dollars exacerbated the crisis, see our commentary on the dollar shortage issue.
Until November 2009, EUR/CAD traded in a fairly tight range between 1.49 and 1.71. The next big move started in December 2009 as the Canadian dollar strengthened as markets bet on crude oil’s resurgence.
2010 – late 2012: euro instability, Canadian dollar rebound
Following the financial crisis, the Canadian dollar quickly rebounded as accelerating crude oil prices helped the currency quickly recover from its earlier losses. A large economic stimulus plan launched in China led to another global commodity rally as traders bet on increasing demand for raw materials.
The euro, on the other hand, was more volatile as debt problems began appearing in peripheral Eurozone countries. During this time, the European Central Bank (ECB) launched several bailout funds (such as the European Financial Stability Facility and the European Financial Stabilization Mechanism). The funds bought government debt from countries including Greece, Portugal and Ireland in order to restore faith in the Eurozone’s banking system. EUR/CAD made a bottom around 1.21 in August 2012.
Late 2012 – early 2014: EUR/CAD divergence
Starting in late 2012, the Canadian dollar began gradually weakening while markets regained faith in the Eurozone. In Canada, GDP growth slowed started in 2012, leading to doubts regarding the ongoing crude oil boom. For the euro, the combined impact of bailout funds and Mario Draghi’s famous “whatever it takes” speech (in which he promised unlimited central bank purchase of Eurozone government bonds, if necessary) restored faith in the common currency as GDP accelerated. EUR/CAD once again made a long-term top close to 1.55.
Early 2014 – early 2015: the great sell-off
Starting in early 2014, the euro began rapidly selling off after the ECB instituted negative deposit rates and began an open-ended asset buying program focused on government and corporate bonds. As capital flowed out of the Eurozone, other currencies appreciated in relative terms. In late 2014, after crude oil began aggressively weakening, the Canadian dollar soon followed. EUR/CAD made a long-term bottom in May 2015 around 1.31.
Early 2015 – 2016: the euro recovery
Following weakness in crude oil, the Canadian dollar didn’t stop selling off until 2016. The euro bear market, on the other hand, ended in early 2015. Thus the euro rose against the Canadian dollar during this period, peaking around 1.58 at the start of 2016.
2016 – 2017: down and up
In recent history, the Canadian dollar staged a comeback in 2016 thanks to rebounding crude oil prices. The euro, on the other hand, was mostly flat against global currencies that year. Thus EUR/CAD weakened throughout 2016.
In 2017, the tables turned following Macron’s victory in the French presidential elections. As political risks dissipated, the euro strengthened against all major peers. Buying euros was a consensus trade throughout the year.
While the Canadian dollar also rallied during the summer of 2017, the pair still ended the year higher. From its lows around 1.40 at the start of the year, EUR/CAD closed the year around 1.50. Our view in late 2017 was that the Canadian dollar was due to sell off in 2018 thanks to weakness in the Canadian economy and a downturn in commodity prices.