UEUR - EUR/CAD Could Hit 1.60 Even With Greater Oil Market Stability

• EUR/CAD is trading significantly higher in late-September 2020, relative to the start of the year.
• These higher prices follow the emergence of the COVID-19 pandemic, which has sent oil prices tumbling.
• Even with relative oil market stability at present, oil prices remain low and as such it is probable that Canadian inflation will too.
• With Canadian and euro area inflation roughly aligned, EUR real yields have climbed twice as much as CAD real yields this year, owing to CAD rates being slashed in spite of a stable ECB deposit facility rate.
• With real yield changes this year favoring EUR/CAD upside, and terms of trade differentials also favoring upside, further upside for EUR/CAD would seem appropriate. The highs of 2018, above the 1.60 handle, would be a possible target. A Purchasing Power Parity model based on the OECD's model would also lend support to this thesis.

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