USD/CAD slides back closer to 1.2500 mark, fresh session lows

• USD/CAD witnessed some fresh selling on Friday and erased the overnight recovery gains.
• Bullish oil prices offset renewed COVID-19 jitters and extended some support to the loonie.
• A solid rebound in US bond yields underpinned the USD and should help limit the downside.

The USD/CAD pair refreshed daily lows, around the 1.2515 region in the last hour and erased the previous day’s modest recovery gains.

The pair struggled to capitalize on the overnight goodish bounce of around 80-85 pips from monthly lows and faced rejection near 100-hour SMA, despite a modest US dollar uptick. Against the backdrop of Thursday’s upbeat US economic docket, which indicated that recovery is well on track, a strong pickup in the US Treasury bond yields extended some additional support to the greenback.

That said, expectations that the Fed will keep interest rates low for a longer period held the USD bulls from placing aggressive bets. This, in turn, was seen as a key factor that capped gains for the USD/CAD pair, rather prompted some fresh selling at higher levels. The intraday pullback, however, lacked any obvious fundamental catalyst and is likely to remain limited.

A devastating third wave of COVID-19 infections in Canada – driven by more transmissible and dangerous variants – should keep a lid on any meaningful upside for the Canadian dollar. The negative factor, to a larger extent, might be offset by the underlying bullish sentiment around crude oil prices, which tend to underpin demand for the commodity-linked loonie.

Meanwhile, the combination of diverging forces suggests that the USD/CAD pair is more likely to consolidate and remain confined well within the previous day’s trading range. This, in turn, warrants some caution for aggressive traders and before positioning for a firm intraday direction amid a relatively lighter economic docket on the last day of the week.

Technical levels to watch