USD/CAD remains on the defensive below mid-1.2700s

• Rebounding oil prices underpinned the loonie and acted as a headwind for USD/CAD.
• A goodish pickup in the US bond yields revived the USD demand and helped limit losses.
• The mixed fundamental backdrop warrants some caution before placing aggressive bets.

The USD/CAD pair traded with a negative bias through the first half of the European session, albeit lacked any follow-through selling and remained confined in a range below mid-1.2700s.

The pair opened with a bearish gap on the first day of a new week and eroded a part of Friday's strong gains to the 1.2800 mark, or the highest level since September 22. Crude oil prices rebounded sharply on Monday and underpinned the commodity-linked loonie. This, in turn, was seen as a key factor that acted as a headwind for the USD/CAD pair.

Meanwhile, views that Friday's slump in the global financial markets – triggered by concerns about the Omicron coronavirus variant – was overdone led to a strong recovery in the risk sentiment. The risk-on impulse led to a solid rebound in the US Treasury bond yields, which revived the US dollar demand and helped limit the downside for the USD/CAD pair.

That said, the latest COVID-19 jitters might have forced investors to reassess the prospects for an early policy tightening by the Fed. This seemed to have held back the USD bulls from placing fresh bets and failed to assist the USD/CAD pair to gain any meaningful traction. The mixed fundamental backdrop warrants caution for aggressive traders.

Monday's US economic docket features the only release of Pending Home Sales data later during the early North American session, though might do little to provide any impetus. Hence, the focus will remain on developments surrounding the coronavirus saga, which will play a key role in driving the broader market risk sentiment and demand for the safe-haven USD.

Apart from this, the US bond yields will also influence the USD. Traders will further take cues from oil price dynamics to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch