11/12/2014 08:39 EST | Updated 01/12/2015 05:59 EST

Canadian dollar rises while Ottawa says budget surplus far short of expectations

TORONTO - The Canadian dollar closed higher Wednesday even as Ottawa said that next year's federal budget surplus will be $1.9 billion — $4.5 billion less than expected and thanks in large part to the Harper government's multibillion-dollar family friendly initiatives.

The loonie rose 0.45 of a cent to 88.37 cents US as the loonie continued to improve from the five-year lows that it reached last week.

The expected surplus, unveiled Wednesday in the government's fall fiscal and economic update, is a far cry from the $6.4-billion surplus projected in February's budget.

That's because of the Conservative government's recently announced family-friendly tax and benefit initiatives, which will consume an estimated $27 billion from public coffers between 2014-15 and 2019-20.

The loonie is ahead 1.3 per cent from its Nov. 5 low, thanks in large part to a much stronger than expected Canadian employment report released on Friday.

Also, oil prices have stabilized above US$77 a barrel and Western Canadian Select — the crude produced in the Alberta oilsands — has ticked up from its recent lows of last week.

On Wednesday, oil prices declined ahead of the latest U.S. inventory data. Prices have fallen dramatically from around US$105 mid-summer.

December crude edged 76 cents lower to a four year low of US$77.18 a barrel.

The International Energy Agency said Wednesday that lower oil prices could hit investment in new supplies, leaving the world more reliant on output from the Middle East. Chief economist Fatih Birol said that if oil prices remain at their current levels, capital investment in U.S. shale oil is expected to decline by 10 per cent next year.

Other commodities were mixed with December gold down $3.90 to US$1,159.10 an ounce and December copper down a cent at US$3.03 a pound.

Meanwhile, there was another reminder that the eurozone could find itself back in recession after the German government's independent panel of economic advisers forecast growth of just one per cent next year. The panel also cut its 2014 growth forecast for Europe's biggest economy to 1.2 per cent from its 1.9 per cent prediction in March. The government recently forecast growth of 1.2 per cent this year and 1.3 per cent next year.

The advisers pointed to "geopolitical risks" such as the Ukraine crisis and weak eurozone growth.