EUR/CAD

Currencies // Developed Markets

• Background

  The euro (EUR) is the official currency of 16 of the 27 member states of the EU (European Union). It is the second largest reserve currency and the second most traded currency in the world after the US dollar. Canada meanwhile is a resources-dominated economy and its currency is heavily affected by sentiment over commodity prices. The euro is the youngest reserve currency of all, coming into existence only in 1999 at a rate of 1:1, replacing the old ECU (European Currency Unit), which served as a shadow currency. The size and strength of the euro area helps to protect it from external economic shocks, such as unexpected oil price rises or turbulence in the currency markets. The Canadian dollar is often seen as a play on oil prices, as well as other commodities, due to its heavy reliance on the export of its mineral resources. In the past, the Canadian dollar has also been popular for “carry trades” though, like most developed economies, interest rates have tumbled in recent years.

• Influencing Factors

  Factors affecting the euro exchange rate are economic data. The most important economic data is from Germany, the largest euro zone economy. Also crucial are the budget deficits of the member countries which must be kept under 3% of GDP. Other important factors affecting the euro exchange rate are the difference in the 10 year government bond yields between Europe and the US and the difference between three month futures contracts (Euribor) and the three month cash eurodollar futures. The euro can also suffer from fears about political instability in Russia due to that country’s close proximity to the euro zone. Factors affecting the value of the Canadian currency are economic indicators including the level of interest rates, trade balance, unemployment, price inflation and GDP.