Author: Mr. Amar – Technical Analysts

Canadian Prime Minister Justin Trudeau’s surprise political deal with the smaller left-leaning New Democrats will result in larger deficits and threaten to squash the Liberal government’s promise to curb runaway inflation. Trudeau on Tuesday announced a rare written “supply-and-confidence” deal in which the NDP will support his minority government until 2025 in exchange for more social spending. Topping the lists are a dental care program for low-income Canadians and a national prescription drug plan, both of which are likely to be costly ongoing spending initiatives, the economists said. Details of the two programs should appear in the federal budget next month.

With Canada’s economy already operating at full capacity and inflationary pressures mounting, additional spending, even if warranted, could hamper efforts to sustain inflation expectations. The rise in tax revenues from rising inflation is likely to cover much of the new spending in the short term, but the deal could add half a percentage point to structural deficits over the medium term. Canada, like other countries around the world, is grappling with late-breaking inflation that hit a three-decade high of 5.7% in February. At the same time, companies are struggling to hire enough workers to meet rising demand.

USD/CAD is struggling to defend the 1.2500 line around a 2-month low, despite bids being raised around 1.2530 during the early Asian session today. The loonie pair fell the previous day to its lowest level since January 2021 when it broke out of the October to December 2021 61.8% Fibonacci retracement. However, the move south was previously supported by a clear breakout of support and a multi-day rising trendline. With that, USD/CAD appears to have a gentle ride towards the January 2022 low of around 1.2450.