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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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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