Canada boosts capital spending in new budget – BBH

Canada’s government ramps up capital spending, keeping deficits low and supporting the BoC’s ability to maintain rates, underpinning the Canadian Dollar (CAD), BBH FX analysts report.

CAD supported as rate cut odds fade

“Canada’s government turned on the fiscal tap to fund an increase in capital investment. The budget deficit is projected at -2.5% of GDP for 2025/26 and -2.0% of GDP for 2026/27 compared to -1.3% of GDP and -0.9% of GDP, respectively, in the last fiscal update in December 2024. Canada has room to dial up spending as the country has one of the lowest deficit-to-GDP ratios in the G7.”

“Extra fiscal support allows the Bank of Canada to keep the policy rate at 2.25% for the foreseeable future, lending some support for CAD. The swaps market price in about 70% probability of a 25bps cut to a low of 2.00% in the next 12 months. We would fade that risk.”