Canada’s government is increasing capital investment while keeping the budget deficit low, which supports the Canadian Dollar. The budget deficit is forecasted to be -2.5% of GDP for 2025/26 and -2.0% for 2026/27. This is higher than the previous deficit projections of -1.3% and -0.9% from December 2024. Canada is in a strong position to raise spending because it has one of the lowest deficit-to-GDP ratios in the G7. This additional fiscal support allows the Bank of Canada to maintain the interest rate at 2.25% for now. The swaps market sees a 70% chance of a 25 basis point cut to 2.00% within the next year. However, analysts suggest that this risk may be overstated, given the stable fiscal situation.

Fxstreet Insights Team Compilation

The FXStreet Insights Team gathers observations from market experts. This includes insights from various analysts and covers current fiscal and economic conditions. Recent areas of focus include surprising data and sector performance, especially related to currency trends and central bank actions. Canada’s government is boosting capital spending, which strengthens the domestic economy. This added fiscal support eases the pressure on the Bank of Canada (BoC) to reduce interest rates from the current 2.25%. A steady interest rate from the BoC benefits the Canadian Dollar. We view this policy as wise, especially since Statistics Canada’s latest report for October 2025 showed inflation at 3.1%, significantly above the BoC’s target of 2%. The national unemployment rate remains stable at about 5.5%, indicating that the economy can handle the current borrowing costs. This suggests that the chance of an immediate rate cut is minimal. The swaps market estimates a 70% chance of a rate cut in the next year, but we believe this is an overestimation. We would back away from expectations of a monetary easing from the BoC. This gap between market predictions and actual economic conditions presents trading opportunities.

Strategies For A Stronger Canadian Dollar

In the upcoming weeks, we should consider strategies that will benefit from a stronger CAD, like buying USD/CAD put options or setting up bearish risk reversals. These strategies will gain if the pair drops as the market adjusts its rate cut expectations. Targeting options that expire in early 2026 provides ample time for these strategies to work. However, we must also acknowledge the strength of the US dollar, bolstered by positive US economic data. The latest ADP jobs report for October 2025 exceeded expectations, reinforcing the Federal Reserve’s cautious approach toward rate cuts. This could limit the gains of the Canadian dollar, suggesting that USD/CAD may slowly decline rather than plummet. This situation mirrors dynamics seen in the early 2020s, where significant government spending allowed central banks to maintain tighter policies than markets expected. Currencies supported by strong fiscal policies and hawkish central banks tended to perform well. We anticipate a similar outcome, favoring the CAD against the USD. Create your live VT Markets account and start trading now.

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