Mark Carney's budget passed, just. File image: Bank of England.
The Canadian Dollar strengthened after political risk evaporated.
The Canadian Dollar was a top performer in otherwise staid markets after Mark Carney's budget cleared following a confidence vote in Ottawa.
The FX reaction says more about politics and positioning than it does about the fundamentals of the budget.
CIBC notes that the CAD has been "an outperformer in G10 as the government passed the Fall budget," with USD/CAD slipping to 1.4033, a modest -0.16% move. The bank stresses that the reaction is slight, but real.
So what explains the outperformance?
? 1. Budget uncertainty has cleared, and markets like clarity.
The government survived the budget vote, avoided an election, and delivered long-awaited fiscal clarity.
For weeks, investors have been forced to price the possibility of a snap election if the government failed its confidence vote. It passed by just one vote.
Scotiabank puts it bluntly: "Canada’s Budget Drama is Finally Over." The Carney government "survived last night’s confidence vote… with no election in sight at least for now."
Removing that political risk premium - however small - tends to support a currency. A government that survives a confidence vote signals continuity in fiscal plans, continuity in policy execution and no imminent disruption to governance.
That alone can justify a firmer CAD, especially after a volatile political period.
? 2. Markets now have a defined fiscal path, however large the deficit.
The budget outlines a C$78.3bn deficit, the second-largest on record, and C$141.4bn in new spending over five years, targeted at housing, infrastructure, defence and productivity.
While the headline deficit is large, what matters for FX is that the budget finally landed, and markets can now anchor expectations. The uncertainty discount fades once the numbers are known.
Importantly, the five-year plan also includes C$60bn in spending cuts and a structural shift within government - including reducing the public workforce by 40,000 jobs through attrition and AI adoption.
This combination of heavy investment and medium-term consolidation is not overtly CAD-bullish - but it is credible enough to keep ratings concerns at bay and prevent a disorderly bond market response.
?? 3. CAD buying was driven by relief, not a bullish macro re-rating.
Given this, CIBC emphasises that the support is limited:
- USD/CAD “has managed to remain above the 1.40 level for most of the month.”
- Analysts "suspect that the 1.40 level will provide a strong support level to come."
- With markets de-risking, "it is unlikely we will see any fundamental driver of CAD strength… that would cause USD/CAD to break very meaningfully below 1.40."
Put simply: CAD is up because one source of uncertainty has vanished, not because investors are suddenly optimistic about Canada’s economic outlook.
? 4. No immediate catalysts ahead.
CIBC also notes that Friday’s retail sales report is “unlikely to move the needle,” and the bank expects USD/CAD to trade narrowly between 1.40–1.4050.
This reinforces the view that the CAD’s outperformance is a technical and political relief bounce, not the beginning of a trend.