Key TakeawaysThe 2025 budget commits to C$280 billion of increased spending over five years, focused primarily on infrastructure, housing, and the military.The federal deficit is projected to be C$78.3 billion in fiscal 2025-26, declining to C$65.4 billion for 2026-27.Analysts say that if the stimulus sparks growth, that should lift the Canadian dollar, bond yields, and stock markets.The US economic environment and the US dollar’s strength would still impact Canadian assets.

Ottawa’s highly anticipated 2025 federal budget arrived with a mix of relief and realism for investors, with a smaller-than-expected deficit that may still take years to balance. However, analysts see little reason to boost their growth forecasts until the promised economic lift materializes.

On Nov. 4, the government released its stimulus plan, outlining a new approach to fiscal discipline and strategic investment. Titled “Canada Strong,” the document projects the federal deficit to rise from C$36 billion in fiscal 2024-25 to C$78.3 billion in 2025-26 (2.5% of GDP), then narrow to C$65.4 billion (2.0% of GDP) in 2026-27. Proposed spending will focus on infrastructure, housing, and the military. Prime Minister Mark Carney’s first budget since he took office promises substantial new spending, targeted tax relief, and incentives for private sector investment.

But some analysts note that balancing the budget could take longer. “The budget was advertised as ‘transformational,’ but it is rather ‘transitional,’ pivoting away from some policies of the previous government,” says Charles St-Arnaud, chief economist at Alberta Central. It remains to be seen “whether the Budget will spur business investment.”

Investors shouldn’t expect any substantial market impacts, as “investments targeted to increase competitiveness and productivity take time and commitment to reap the benefits,” says RSM chief economist Joe Brusuelas.

Lower-Than-Expected Issuance Numbers Keep the Lid on Bond Yields

The bond market was relieved that the new government’s bond issuance pans were not as expansive as feared, which kept short-term yields from spiking and prevented the flattening of the yield curve.

Morningstar DBRS issued a report maintaining a stable AAA rating for the country. “We have a high degree of comfort in that credit rating, thanks to the country’s large and diversified economy, strong governing institutions, and sound macroeconomic policymaking,” writes DBRS senior vice president and sector lead of global sovereign ratings Travis Shaw.

Sam Acton, portfolio manager, co-head fixed income at Picton Investments, says the deficit and bond issuance figures “came out toward the low end of expectations, providing a slight initial relief to the bond market, with government yields dropping 3-4 basis points across the curve.”

Dustin Reid, chief strategist, fixed income at Mackenzie Investments, observes that issuance plans were little changed, and there was no uptick in the 10- and 30-year ends of the curve, as some had feared. “As a result, there should be no major impact on the Canadian sovereign curve in the short-term,” he says. This would drive up yields to compensate for added risk. Since government bonds are the benchmark for other borrowing rates, rising yields push up the cost of borrowing for homeowners and businesses.

All things considered, Ashish Dewan, senior investment strategist at Vanguard Canada, expects Canadian bonds to deliver annualized returns in the range of 3.2%-4.2% over the next ten years.

A Supportive Budget Gives the Bank of Canada a Chance to Pause Cuts

The budget comes at a challenging time for the domestic economy, which needs support against headwinds from trade tension, weaker growth, a cooling market, and sluggish business and consumer spending.

Dewan doesn’t anticipate further interest rate cuts from the Bank of Canada this year, but he expects “economic support to be a priority over inflation containment, as GDP growth is below trend and labor market conditions are softening.”

A similar forecast puts RSM’s Brusuelas in the same camp: “Monetary policy can only do so much under current conditions, and Carney is uniquely suited to understanding that.” The central bank has cut rates four times this year, including back-to-back cuts at its last two meetings, bringing its policy rate down to 2.25%—the lowest end of its neutral range.

Picton’s Acton strikes a contrasting note, expecting the Bank to continue to lower rates. “With the backdrop of stagnant growth and lingering economic uncertainty, the Bank may still need to react with a further reduction in interest rates over the next year,” he says.

Mackenzie’s Reid says the additional fiscal stimulus might keep the Bank on the sidelines for a bit longer, but policymakers were already aware of much of the announced spending. “As a result, further deterioration in Canada’s short-term economic outlook will keep the Bank of Canada ready to cut rates again,” he says.

Brusuelas says the Bank of Canada is well-positioned to cut further to complement fiscal policy, should the domestic economy remain sluggish.

Stock Investors Should Sit Tight

The proposed C$280 billion in investments are spread across C$115 billion for infrastructure, C$110 billion for productivity and competitiveness, C$30 billion for defense, and C$25 billion for housing.

Vanguard’s Dewan says investors looking for opportunities in these allocations will need to dig deeper. Asset class returns are influenced by a wide range of variables, not just government spending. “Factors such as trade policy, the rise of artificial intelligence, structural deficits in the United States, deglobalization, and demographic shifts will play a significant role in shaping future investment opportunities both in Canada and globally,” he explains. It’s also important to recognize that promises in the budget may look different when implemented.

A Modest Rebound in the Canadian Dollar Looks Likely

The key consideration for the currency market is whether the budget provides enough growth-boosting investment without triggering fiscal instability, according to Tom Nakamura, currency strategist and co-head of fixed income at AGF Investments. “Currency investors want to see a credible path forward for the Canadian economy to adjust to shifting international trade relations,” he explains.

Canadian investors are focused on whether the budget will provide enough stimulus to keep further interest rate cuts off the table. Overall, Nakamura isn’t “expecting a large direct reaction to this [budget] from the Canadian dollar in the near term.” He thinks the execution of the plan will determine the direction of the Canadian dollar over time.

For now, the currency market appears to be driven by the global investing pivot to risk-off sentiment. Sarah Ying, head of FX strategy at CIBC, says, “The risk-off tone is hitting high-beta pairs, [as the] US/CAD already has exceeded highs of C$1.41.” High-beta pairs are currencies that tend to fall more sharpy against the US dollar. During times of uncertainty, investors move money away from riskier currencies, seeking refuge in safer ones such as the US dollar. Ying calls the 2025 federal budget “very benign, happy,” as the lower-than-expected deficit helped alleviate the budget-driven market anxiety.

Still, other risks abound. Nakamura sees many headwinds before year-end, including the formal approval of the budget and a US Supreme Court ruling on tariffs. There’s also the matter of Lisa Cook, a US Federal Reserve governor whom President Donald Trump has attempted to fire. The move threatens the independence of the US central bank, weakening the US dollar, which in turn lifts the loonie. “These will undoubtedly shape market reactions over the next few months, but my base case is for a modest rebound in the Canadian dollar, from C$1.41 toward C$1.39,” Nakamura says. He adds that this strength is likely to be driven further by the softening of the US dollar.

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