Canada’s government increases capital investment while maintaining a low deficit, supporting the Canadian Dollar. The budget deficit is projected at -2.5% of GDP for 2025/26 and -2.0% for 2026/27. This compares to -1.3% and -0.9% GDP ratios from the previous fiscal update in December 2024. Canada is positioned well to increase spending due to having one of the lowest deficit-to-GDP ratios in the G7.

The extra fiscal support enables the Bank of Canada to keep the policy rate steady at 2.25% in the near future. The swaps market predicts a 70% chance of a 25 basis points cut to 2.00% over the next 12 months. Analysts suggest fading this risk as the fiscal environment continues to provide a stable foundation for CAD.

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Canada’s government is increasing its capital spending, which will provide a boost to the domestic economy. This extra fiscal support reduces the pressure on the Bank of Canada (BoC) to cut interest rates from the current 2.25%. A steady policy rate from the BoC is a supportive factor for the Canadian Dollar.

We see this policy decision as sound, especially since Statistics Canada’s latest report for October 2025 showed inflation holding firm at 3.1%, still well above the BoC’s 2% target. With the national unemployment rate also stable around 5.5%, the economy appears strong enough to withstand current borrowing costs. This data makes the case for a rate cut in the near term look very weak.

The swaps market is currently pricing in a roughly 70% chance of a rate cut within the next 12 months, but we think this is an overstatement of the risk. We would fade the market’s expectation for monetary easing from the BoC. This difference between market pricing and fundamental reality is where the trading opportunity lies.

Strategies For A Stronger Canadian Dollar

For the coming weeks, we should look at strategies that benefit from a stronger CAD, such as buying USD/CAD put options or establishing bearish risk reversals. These positions would profit if the pair moves lower as the market adjusts its rate cut expectations. Targeting expiries in early 2026 would give the strategy time to play out.

However, we must also recognize that the US dollar remains strong following upbeat American economic data. The most recent ADP jobs report for October 2025 was better than forecast, reinforcing the Federal Reserve’s own cautious stance on cutting rates. This could temper the Canadian dollar’s gains, suggesting USD/CAD may grind lower rather than fall sharply.

This reminds us of the dynamic we saw in the early 2020s, where significant government spending allowed central banks to keep policy tighter than markets initially predicted. Currencies backed by solid fiscal policy and hawkish central banks tended to do well in that environment. We expect a similar outcome to unfold here, ultimately favoring the CAD against the USD.

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