07:18 AM EST, 12/17/2024 (MT Newswires) -- One of the main developments Monday was the surprise decision by Canadian Finance Minister Chrystia Freeland to resign just hours ahead of presenting the so-called fall economic statement (FES), said Mitsubishi UFG.

The decision triggered a modest sell-off for the Canadian dollar (CAD or loonie) which is currently trading close to year-to-date lows against the US dollar at around 1.4270, wrote the bank in a note to clients. There was also a sell-off in the Canadian government bond market with the 10-year yield rising by around 8bps up to a high of 3.23% before dropping back to 3.18%.

Former Finance Minister Freeland's decision to resign was driven by a falling out with Prime Minister Justin Trudeau over the direction of fiscal policy, stated MUFG. Freeland stressed that the government should keep "our fiscal powder dry today, so we have the reserves we may need for a coming tariff war. That means eschewing costly political gimmicks, which we can ill afford and which make Canadians doubt that we recognize the gravity of the moment."

Freeland had refused an offer for a new role in the government involved in helping to manage the Canada-United States trade relationship but wouldn't have included running a government department.

The Canadian government ran a much larger fiscal deficit than planned in the last fiscal year coming in at $62 billion compared with former Finance Minister Freeland's pledge to keep the shortfall at or below $40.1 billion. Higher than expected charges for Indigenous contingent liabilities and COVID-19 support allowances added $21.1 billion to the deficit in the last fiscal year.

According to the FES update, the government will run a narrower deficit of $48.3 billion in current fiscal year 2024-25 coming at around 1.6% of GDP compared with the finance department's forecasted deficit of $42.2 billion. Despite running a wider deficit again, the size of Canada's budget deficit remains relatively smaller than for other major economies, pointed out the bank.

The FES also outlined key new expenditures including a $1.3 billion for border agencies over six years in an attempt to tighten border controls in response to U.S: President-elect Donald Trump's threat to impose 25% tariffs on all goods imported from Canada unless the country takes action to address inflows of illegal immigrants and drugs.

The government also announced an extension of tax breaks on business investment through to 2030 that will cost $17.4 billion.

Freeland's decision to resign and publicly criticize the government's fiscal policy plans has further weakened Prime Minister Trudeau's grip on power in Canada, according to MUFG. In September, the New Democratic Party pulled out of a so-called "supply and confidence" arrangement that helped the Liberals pass laws in the house of Commons, where it's the largest party but doesn't have a majority of seats.

The unfavorable political developments are supportive to the bank's long USD/CAD trade idea although are unlikely to trigger a significant sell-off for the Canadian dollar on their own, added MUFG.