While risk appetite has been heightened in the wake of Donald Trump’s latest press conference the Euro Canadian Dollar exchange rate nevertheless returned to an uptrend on Thursday.
- ECB minutes highlighted continued caution amongst policymakers – Prospects of quantitative easing tapering dented
- Oil oversupply worries limited Canadian Dollar appeal – Rising US production could undermine higher crude prices
- Improved German ZEW confidence index predicted to shore up Euro – Stronger sentiment would bode well for domestic outlook
- BOC rate decision in focus – No change in policy expected at this juncture
As the latest Canadian data proved disappointing the Canadian Dollar saw a fresh round of selling, helping to boost the EUR CAD exchange rate.
Dovish ECB Minutes Failed to Weigh on Euro Demand
Demand for the Euro (EUR) remained limited on Thursday thanks to the release of the European Central Bank’s (ECB) December meeting minutes. While the sentiment amongst policymakers proved a little more mixed than expected this was not enough to boost the single currency. Given the prominent division between members of the Governing Council and the somewhat limited pick up in domestic inflationary pressure the prospect of the quantitative easing program being tapered in the near future appeared limited.
As US crude oil stockpiles were found to have risen markedly on the week, in a sign that production is rising to fill the gap left by OPEC’s output cuts, the Canadian Dollar (CAD) weakened across the board. There was also a minor disappointment from the Canadian new housing price index, with the moderation of growth in the housing market leading the Euro Canadian Dollar (EUR CAD) to trend higher.
Stronger German Economic Sentiment Could Extend EUR CAD Exchange Rate Gains
Expectations are for the German ZEW economic sentiment index to show a further uptick in domestic optimism in January, adding to the impression of robustness within the Eurozone’s powerhouse economy. This may offer a rallying point to the EUR CAD exchange rate, providing that there is not any fresh escalation in local political worries. Even so, the continued strength of Germany could prove fragile, as Carsten Brzeski, Chief Economist at ING, noted:
‘The year 2017 will in our view look very much like 2016, only with a bit less of everything. Domestic demand, i.e. construction and both private and public consumption, should remain the main growth drivers. The biggest risk for the economy is not Trump or political populism in the Eurozone but self-complacency. The economy urgently needs new impetus from new structural reforms and stronger public and private investment. It is very unlikely that it will get any of these before the elections.’
Volatility for the Euro can also be expected in response to the January policy meeting of the ECB, even though there is unlikely to be any particular shift in sentiment from what was seen in the December minutes.
Canadian Dollar Volatility Expected ahead of BOC Rate Decision and Inflation Data
The Bank of Canada (BOC) will also be in focus next week, although policymakers are still expected to leave interest rates on hold. Investors will be interested to see the tone of the discussion and will be looking for any signs that the BOC could be shifting away from its neutral policy bias in the near future. However, given the strength of the recent labour market data is seems likely that the BOC will maintain a more positive outlook on the economy, to the benefit of the Canadian Dollar.
Friday’s Consumer Price Index could trigger further volatility for the ‘Loonie’ if inflation is shown to have fallen back in December. As inflation has been showing good progression towards the BOC’s target range, though, any small dip is unlikely to have a major detrimental impact on the Canadian Dollar. If the CPI remains steady, however, the EUR CAD exchange rate may come under fresh pressure.
Current Interbank Exchange Rates
At the time of writing, the Euro Canadian Dollar (EUR CAD) exchange rate was trending higher in the region of 1.39, while the Canadian Dollar (CAD EUR) pairing was slumped around 0.7144.