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.

The Canadian Dollar (has recently plummeted to its lowest level in over four and a half years. Trading at approximately 1.42 CAD per USD as of Friday. The sharp decline has raised concerns among investors and businesses.

After hitting its lowest intraday level since April 2020 at 1.4244, the loonie was trading 0.1% lower at 1.4230 per US dollar, or 70.27 US cents. The currency saw its third consecutive weekly decrease, down 0.5%.

Investors’ outlook for the Canadian dollar has been bleak. The historically high bearish bets against the Loonie indicate a lack of optimism for the currency’s immediate rebound.

Bond yield spreads are one factor contributing to this pessimism. The USD has benefited from the widening difference between Canadian and US bond yields. The Loonie has weakened further as Canadian bonds have struggled to draw interest due to higher yields offering greater returns in the US.

The declining value of the Loonie has practical repercussions for Canadians. A lower CAD makes importing goods and raw materials more expensive for firms. Customers may pay more as a result, which would increase inflation.

The declining currency value will affect those who intend to travel or study overseas, reducing their purchasing power. However, a more competitive exchange rate might help exporters, although this bright spot seems insignificant in light of the larger economic difficulties.

For Canadians, it’s a mixed bag, with uncertainty having a greater negative impact.

Prime Minister Justin Trudeau’s government is coming under increasing fire for handling economic problems, such as record unemployment and skyrocketing public debt. Critics contend that the economy is now susceptible to external shocks due to inadequate budgetary actions.

Although the Trudeau government claimed to have taken action to combat unemployment, many people think these purported initiatives have not been successful.

Consumer confidence has fallen to an all-time low, and job creation is still slow. As a result, domestic demand has stagnated, worsening the Canadian economy’s problems.

The Trudeau government risks extending this downturn unless drastic policy adjustments are made. Trudeau’s response may determine the direction of the Canadian dollar in the upcoming months.

In the interim. Some analysts already believe the government exceeded the deficit cap, and the parliamentary budget officer has predicted that the Liberals’ fall economic update on Monday would reveal a larger-than-promised deficit of $46.8 billion.

The Global and Mail received a leak from Finance Minister Chrystia Freeland’s office estimating the budget shortfall to be around $60 billion.

Ms. Freeland’s relationship with the Prime Minister’s Office has soured due to higher expenditure, making it challenging to reach the $40.1 billion deficit target she pledged in Monday’s fiscal and economic update.

In April, she set three self-imposed “fiscal guideposts” for her government, including keeping the deficit at or below that amount.

The Globe and Mail reported that Trudeau and Freeland disagree on spending. The government’s $6.28-billion plan for a holiday sales-tax break and $250 payments for those making up to $150,000 has angered her office and the nonpartisan Finance Department.

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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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