Canada’s Spring Economic Update is due at 16:00 ET on Tuesday. TD Securities expects a CAD 60bn deficit in 2026–27, compared with a CAD 65.4bn shortfall in Budget 2025.
The forecast assumes higher revenues after upward revisions to nominal GDP. It also assumes only modest new spending in the update.
Borrowing projections for 2026–27 are expected to show limited change. T-bills are expected to cover new spending needs.
The Canada Strong Fund is expected to need about CAD 8bn per year in funding through 2028–29. Its CAD 25bn endowment is planned to be spread over three years.
With the Spring Economic Update scheduled for later today, we see this largely as a non-event for the markets. The expected deficit of around $60 billion is a slight improvement and has been well-telegraphed, suggesting it is already priced into current asset values. This points towards low implied volatility, meaning options strategies that bet on a large price swing in Canadian government bond futures or the currency are unlikely to be profitable.
For interest rate traders, the update reinforces the existing outlook for the Bank of Canada. With the latest data from Statistics Canada showing Q1 2026 inflation holding just under 3% and the Bank holding its policy rate steady earlier this month, a fiscally stable budget removes a key variable that could have forced a policy change. We expect this to keep the Canadian yield curve relatively stable in the near term, favouring positions that benefit from range-bound interest rate expectations.
The Canadian dollar may see some minor, temporary strength on the official confirmation of an improved fiscal picture. However, with implied volatility on USD/CAD options already near yearly lows, significant follow-through is not expected. Looking back at how the market digested the similarly structured Budget 2025, the reaction was muted, and we anticipate a similar outcome this time.
The government’s financing plan, relying on T-bills and the new Canada Strong Fund, is crucial for bond traders. By focusing on short-term debt, there is less pressure on the supply of longer-dated bonds, which should help keep long-term yields anchored. This strategy avoids unsettling the bond market and suggests a continued stable environment for government debt.
