The dollar initially weathered the U.S. government shutdown. However, with the FAA now actively canceling flights, the negative GDP impact is becoming more tangible and less likely to be recovered quickly, increasing downside risk for the currency.
Because Canada is operating with excess economic capacity, its new fiscal stimulus is seen as supportive but not inflationary. This provides a floor for the Canadian dollar (CAD) without forcing central bank hikes, making it a stable, low-volatility funding currency.
The US dollar's rally has a natural ceiling because the government shutdown is withholding crucial growth and labor market data. Without this data, markets lack the conviction to push the dollar significantly higher, making the trend self-limiting.
Sterling's reaction to potential UK budget options is "any news is bad news." Even less-damaging proposals cause weakness because the market understands any policy will result in fiscal tightening, forcing the Bank of England to react dovishly.
Canadian bond yields fell after the budget announcement, indicating the market had priced in a "risk premium" for a much larger fiscal stimulus package. The actual deficit, while large, fell short of these aggressive expectations, preventing further currency weakness.