EUR/CAD Exogenous Analysis
- The EU and Canada Current Account to GDP differential
When a country has a high current account to GDP ratio, it means that it is running a current account surplus. That implies that the country is highly competitive in international trade as the value of its exports is higher than its imports. Conversely, a country with a low or negative current account to GDP ratio, is running a current account deficit. It means that the value of its imports is higher than exports.
In 2020, Canada’s current account to GDP is expected to hit -2.7% while that of the EU 3.4%. Thus, the current account to GDP differential between the EU and Canada is 6.1%. This means that the EUR is in higher demand in the international market than the CAD. We assign a score of 5.
- The interest rate differential between the EU and Canada
In the forex market, interest rate differential helps to show investors and traders which currency will earn them higher returns. In a carry trade, forex traders tend to be bullish on the currency that offers a higher interest rate differential. This means that the currency with the higher interest rate will have a higher demand than the lower interest rate.
The European Central Bank has maintained interest rates at 0% throughout 2020, while in Canada, interest rates were cut from 1.75% to 0.25%. Thus, the interest rate differential for the EUR/CAD pair is -0.25%. We assign a score of -2.
- The EU and Canada GDP Growth Rate differential
Since countries vary in the economy’s size, it makes it hard to compare them based on absolute GDP. However, the GDP growth rate helps filter out the effects of the economy size and instead compares countries based on their growth.
From January to September 2020, the Canadian economy has contracted by 4.3% while the EU economy has contracted by 2.9%. That means that the GDP growth rate differential between the EU and Canada is 1.4%. i.e., the Canadian economy has contracted more than the EU economy. We assign a score of 4.
The exogenous analysis of the EUR/CAD pair has a score of 8, which means we can expect a bullish trend for the pair in the short-term. This is supported by our technical analysis, which shows the weekly chart bouncing off the lower Bollinger band, implying that an uptrend is looming.
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