EUR\/CAD extended its advance for a second session, trading near 1.6230 in European hours on Friday as the Euro firmed ahead of HCOB PMI releases for Germany and the Eurozone. The single currency\u2019s upside was tempered by easing inflation that has moved the bloc closer to price stability, with markets assigning roughly one-third odds to a July European Central Bank rate hike.<\/p>\n
The cross also drew support from a softer Canadian Dollar as global oil prices slipped following easing Middle East tensions after diplomatic progress between the US and Iran. Doha talks mediated by Qatar and Pakistan reduced the geopolitical risk premium that had propped up energy prices, feeding through to lower energy-led inflation in Canada and reinforcing expectations for a more dovish Bank of Canada stance.<\/p>\n
Canada\u2019s manufacturing data offered limited relief: the S&P Global Manufacturing PMI ticked up to 53 in June from 52.9 in May, indicating mild expansion. Even so, the drop in crude continued to weigh on the currency backdrop, leaving the Canadian Dollar exposed against the US dollar.<\/p>\n
We see a clear divergence in monetary policy expectations that should continue to push the EUR\/CAD pair higher in the coming weeks. The Bank of Canada (BoC) is facing mounting pressure to cut rates due to falling inflation, while the European Central Bank (ECB) appears firmly on hold. This fundamental split is the primary catalyst for our bullish outlook on the cross.<\/p>\n
The case for a stable Euro is supported by the latest Eurostat flash estimate showing June inflation at 2.1%, keeping it just above the ECB\u2019s target. This reinforces the market view that while a rate hike is off the table, a rate cut is not on the immediate horizon. This provides a solid foundation for the Euro against a weakening Canadian dollar.<\/p>\n
In contrast, Canada\u2019s inflation recently fell to 1.9% in the latest report from Statistics Canada, slipping below the BoC\u2019s 2% target for the first time in over a year. Consequently, overnight index swaps are now pricing in an 85% probability of a BoC rate cut by its September meeting. This growing expectation is a significant headwind for the Canadian currency.<\/p>\n
The weakness in the Canadian dollar is amplified by the continued slide in energy prices, with WTI crude oil breaking below the key $65 per barrel support level. This is a direct result of easing geopolitical tensions and directly hurts Canada’s export-driven economy. We have seen similar periods of sustained low oil prices, such as in 2015-2016, coincide with significant underperformance of the loonie.<\/p>\n
Given this outlook, we are positioning for a continued move towards the 1.6400 level by purchasing EUR\/CAD call options. Specifically, we are looking at August and September expirations with strike prices around 1.6300 to capture the expected upward drift. The current environment of relatively low volatility makes this an efficient way to gain upside exposure while strictly defining our risk.<\/p>\n
To manage costs and potential short-term pullbacks, we are also using bull call spreads. This involves buying a call option at a lower strike price while simultaneously selling another call at a higher strike price. This strategy reduces the net premium paid, providing a cost-effective way to profit if the pair rises moderately as we anticipate.<\/p>\n\n\n\n