CAD Declines Below 1.41 Against USD
The Canadian Dollar (CAD) continues to weaken this morning, underperforming relative to other currencies with a 0.2% loss against the US Dollar (USD), according to Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret.
Federal Budget Impact
Significant government spending is planned on housing, defence, infrastructure, and initiatives to boost productivity and competitiveness. These measures aim to encourage investment and drive economic growth. However, the budget deficit is substantial, expected to reach CAD 78 billion, far surpassing the previous forecast of CAD 42 billion from last December.
"As expected, the Federal budget laid out significant spending on housing, defence, infrastructure and productivity and competitiveness, all aimed at boosting investment and lifting growth. The red ink spillage is significant, though with the current FY deficit forecast to rise to CAD78bn (well above the CAD42bn projected under the previous government back in December)."
Political Landscape and Market Reaction
The minority government will require support from other parties to pass the budget legislation, but another election seems unlikely for now. The CAD shows little strength, with spot gains diverging significantly from the fair value estimate of 1.3917.
"The minority government will need help for the budget legislation to pass but another election seems very unlikely at this point. The CAD looks unimpressed and spot gains are deviating more significantly (well above one standard deviation) from our fair value estimate (1.3917) again."
USD Resistance and Future Outlook
The USD has surpassed the resistance level at 1.4080, now considered initial support. The recent move through the 1.41 level indicates potential further appreciation towards 1.4160, which aligns with the 50% retracement of the February to June decline.
"Spot dollar gains through the 1.4080 resistance point (now initial support) have been flagged as a risk for a while now and the USD’s progress through to the 1.41 handle this morning points to further appreciation to the 1.4160 area (50% retracement of the Feb/Jun decline in the USD at 1.4167)."
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Author’s summary: The Canadian Dollar remains under pressure amid a significant federal budget deficit and political challenges, with technical indicators suggesting further USD gains.