The Canadian dollar plunged even deeper against the US Greenback Thursday following the Trudeau government’s announcement of a $61.9 billion budget shortfall and the exit of Chrystia Freeland, the deputy prime minister and finance minister.

The Canadian dollar fell to its lowest since March 2020, dropping 0.5 percent on Tuesday to trade past 1.43 per US dollar. It has dropped more than 7 percent against the US dollar this year, putting it on track for its worst performance since 2018.

The Canadian dollar appears to be losing ground due to the potential for a US-Canada trade conflict, significant cuts by the Bank of Canada, a bleak oil price outlook, and current political unrest.

The gap between the U.S. Federal Reserve’s policy rate and the Bank of Canada’s rate has increased to approximately 130 basis points due to the Bank of Canada’s decision to lower its policy rate by 50 basis points last week.

Interest Rates in Canada

Despite the possibility that the Federal Reserve may reduce its rate at its meeting this week, a substantial U.S. premium will continue to exist.

Interest rates in Canada will continue to be significantly lower than those in the United States for the foreseeable future, as they are dependent on policy rates.

This disparity will continue to pressure the value of the Canadian dollar against the U.S. greenback, as investors will continue to favour U.S. dollar-denominated assets with higher earnings over Canadian dollar assets.

If the Bank of Canada responds to Trump’s actions by making additional rate cuts, the loonie could also be further pressured downward by President-elect Trump’s threatened trade actions against Canada.

Contextually, on January 1, 2024, it cost 1.33 Canadian dollars to purchase one U.S. dollar instead of 1.43 Canadian dollars on December 13, 2024. This indicates a considerable decrease in the value of the Canadian dollar of approximately 7.6% during the specified time frame.

Capital Leaving Canada

In summary, it will elevate inflation through increased import prices and increased demand for domestic output and labour. Additionally, it may reduce productivity growth and exacerbate the reduction in living standards.

Investment in this category of physical capital is instrumental in stimulating productivity growth, as Canada imports most of its apparatus and equipment, including information and communications technology, from the United States and other countries.

The increased cost of capital equipment imports is due to the declining Canadian currency, discouraging investment and slowing productivity growth.

It may also protect domestic firms from foreign competition, reducing their motivation to invest in productivity-enhancing assets, even if they price their output in U.S. dollars.

According to foreign exchange analysts, the resignation of a prominent member of Canada’s government has introduced a degree of political uncertainty into financial markets. As evidenced by the recent experiences of the UK and Eurozone, political uncertainty can significantly impact currencies.

Prime Minister Justin Trudeau’s government unveiled a stunning $61.9 billion year-end deficit just hours after Chrystia Freeland resigned from cabinet, sending shockwaves through Ottawa on Monday.

Trudeau’s spending spree created a larger-than-expected deficit in the government’s budget last year, raising concerns about the country’s fiscal health and laying the groundwork for a difficult economic landscape ahead.

Canada’s budget deficit for the fiscal year ending March 31 was $61.9 billion ($43.45 billion), more than half of what was forecast last year. However, it fell short of one of three key fiscal objectives that Finance Minister Chrystia Freeland established.

This year’s fiscal report, the Fall Economic Statement, was substantially delayed, leading economists and analysts to speculate that the government would have exceeded its fiscal projections.

The update comes after Freeland resigned due to differences with Trudeau regarding government expenditure.

Freeland, the finance minister since 2020, said she had no choice but to resign after the prime minister approached her on Friday about shifting her to another cabinet position.

She also took a final shot at Trudeau’s handling of Canada’s economy, condemning Justin’s “costly political gimmicks” and urging him to collaborate with provincial premiers to face Trump’s tariff threat.

Trudeau Slammed Over Debt

In November 2023, Freeland predicted a deficit of $40.1 billion ($28.17 billion) in 2023-24 and a debt-to-GDP ratio of 42.4% in 2024-25 that would continue to fall.

She vowed to reduce the deficit-to-GDP ratio in 2024-25 and to keep deficits under 1% in 2026-27 and subsequent years. While the government met its debt-to-GDP objective, its deficit-to-GDP ratio increased to 2.1% from 1.4% expected.

The government expects GDP growth to be 1.7% next year, down from 1.9%.

Meanwhile, opposition parties have expressed concern over the ballooning deficit, challenging Trudeau’s economic management and calling for stricter budgetary limits.

Conservative Party leader Pierre Poilievre slammed the government’s policy, saying, “Canadians deserve a plan that prioritises fiscal responsibility and economic stability, not a never-ending cycle of debt.”

Poilievre called on Trudeau to allow an immediate vote on the fall economic statement so that the government could be toppled, triggering an election. He stated that Freeland’s resignation demonstrates the government’s “spiralling out of control…at the worst possible time.”

“For the past decade, nine years, Freeland has been Mr. Trudeau’s most trusted minister. She knows him better than anybody else and recognizes that he is out of control.

NDP Leader Jagmeet Singh urged the prime minister to resign, saying “all options are on the table.” He did not say whether he meant supporting the Conservatives in a vote of no confidence.

The rapid succession of events also rekindled pre-existing tensions inside the Liberal ranks, with several backbencher MPs repeating their calls for the prime minister to go.

Trudeau will meet with the MPs later tonight. Dozens of them are anticipated to urge him he needs to quit for mismanaging his relationship with Freeland.

Liberal MP Wayne Long, who was involved in a prior attempt to unseat Trudeau, stated that around one-third of the 153 sitting Liberal MPs want the prime minister to resign immediately, another third are undecided, and the other third are self-proclaimed Trudeau supporters.

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Finance Minister Chrystia Freeland announced on Monday that the Liberal government will release its fall economic statement on December 16, including the government’s revised deficit forecast.

The mid-fiscal-year mini-budget will be released later than usual owing to parliamentary deadlock, Finance Minister Chrystia Freeland said last week, adding that it will include expenditure specifics and fiscal anchors.

“Our government is committed to delivering fairness for all generations… “I look forward to presenting the next steps in our economic plan to ensure a good middle-class life for all,” Freeland said in a statement on Monday.

The mini-budget will come as Prime Minister Justin Trudeau’s minority administration faces heightened uncertainty due to the loss of support from the New Democratic Party and a threat of tariffs from US President-elect Donald Trump. Elections must take place by late October 2025.

Chrystia Freeland Budget Promise

The budget update may include spending measures to strengthen Canada’s border with the United States, as Trudeau promised Trump at a surprise visit in Florida in late November.

After postponing the government’s debt-reduction objectives twice in 2023, Chrystia Freeland promised a C$40.1 billion (US$28.36 billion) deficit in 2023-24, a reduction in the debt-to-GDP ratio, and a deficit-to-GDP ratio of less than 1% by 2026-27 and beyond.

Some analysts believe the targets are problematic as the economy slows and spending temptations rise in an election year.

“Canada faces substantial economic and fiscal concerns, such as poor innovation and productivity, an ageing population, and geopolitical tensions that may impede trade flows. In this context, economic discipline is critical,” Business Council of Canada senior vice president Robert Asselin said in a statement.

“The government must use the December 16th Fall Economic Statement to prioritise effectively and adopt greater fiscal discipline,” according to Asselin.

Trudeau’s Liberal administration, which trails the opposition Conservatives in surveys on topics such as the cost of living, has already survived two confidence votes, and provisions in the mini-budget could give his opponents another chance to bring him down.

Chrystia Freeland’s mini-budget will coincide with Bank of Canada Governor Tiff Macklem’s yearly address to Canadians.

Macklem is scheduled to speak at the Greater Vancouver Board of Trade at 12:35 p.m. (2030 GMT) on the same day to discuss progress towards bringing inflation back to target and new difficulties ahead.

Chrystia Freeland’s policies have left many Canadians facing increased costs and economic uncertainty. Inflation continues to hammer households hard, and her initiatives have not provided relief.

Critics argue that her strategy focuses too little on long-term stability, leaving businesses and people struggling.

Tax policies and spending objectives appear detached from what Canadians require. People are frustrated, wondering why answers seem out of reach despite several promises.

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