07:01 AM EST, 11/04/2025 (MT Newswires) -- The Canadian dollar (CAD or loonie) has been one of the best-performing G10 currencies over the last couple of weeks alongside the US dollar (USD), said MUFG.

USD/CAD attempted and failed to break back below the 1.4000 level after the Bank of Canada signaled that it's likely to pause its rate cut cycle in the near-term, stated MUFG. The impact from the hawkish BoC guidance was then quickly offset by hawkish communication from Federal Reserve Chair Jerome Powell last week when he pushed back more strongly against market expectations for another 25bps Fed rate cut in December.

With the BoC judging that there is less room to loosen monetary policy further to support growth in Canada in the near-term, the government is expected to step up to the plate on Tuesday when it outlines its plans for looser fiscal policy, wrote the bank in a note to clients.

Prime Minister Mark Carney has confirmed that he plans to run a "substantial" deficit, saying that "bold risks" are needed to reform an economy facing an unprecedented economic threat from the United States. Carney emphasized that Tuesday's budget will be about "building, taking control and winning."

Generational investments are expected in housing & infrastructure, defense & security, climate competitiveness & innovation, and reskilling & labor mobility, pointed out the bank. The budget is expected to announce plans to run a much bigger budget deficit for the current fiscal year of $70 billion-$75 billion or higher, which compares with the deficit of $42 billion forecast back in December.

Defense spending is expected to be raised up to 2% of gross domestic product, and the government has pledged to raise it to 5% of GDP by 2035.

Canada's plans for looser fiscal policy have been supported by the International Monetary Fund, which welcomed that the government recognizes the need to use its fiscal space in very testing times, added MUFG.

Overall, a bigger fiscal stimulus plan should help to provide more support for the Canadian dollar in the year ahead if it successfully helps to lift growth and reduce pressure on the BoC to lower rates further, according to the bank.