USD/CAD pares intraday losses, bulls have the upper hand around mid-1.2700s

• A combination of factors assisted USD/CAD to attract some buying near the 1.2720 area.
• Retreating crude oil prices undermined the loonie and extended some support to the pair.
• The Fed’s hawkish stance, the risk-off impulse drove some haven flows towards the USD.

The USD/CAD pair trimmed a part of its intraday losses and was last seen hovering around mid-1.2700s heading into the North American session.

A combination of supporting factors assisted the USD/CAD pair to attract some dip-buying near the 1.2720 area on Monday, though the uptick lacked bullish conviction or a strong follow-through. An intraday pullback in crude oil prices undermined the commodity-linked loonie. Apart from this, the not so hawkish Bank of Canada rate decision to leave the benchmark interest rate unchanged last week continued weighing on the Canadian dollar and extended some support to the USD/CAD pair.

On the other hand, the prospects for a faster policy tightening by the Fed remained supportive of elevated US Treasury bond yields and acted as a tailwind for the US dollar. This, along with a fresh leg down in the equity markets, helped revive demand for the safe-haven greenback. That said, the flattening of the US Treasury yield curve held back the USD bulls from placing aggressive bets and kept a lid on any meaningful upside for the USD/CAD pair, at least for the time being.

Hawkish comments by Atlanta Fed President Raphael Bostic over the weekend bolstered bets of aggressive policy tightening by the Fed and dampened future growth expectations. This is playing out in the money markets, where the spread between two and ten-year US government bonds fell below 59 bps for the first time since early November. This, in turn, warrants some caution before positioning for the resumption of the USD/CAD pair's recent move up from over two-month low, around mid-1.2400s set last week.

Market participants now look forward to the US economic docket – featuring the release of the Chicago PMI. This, along with the US bond yields, will influence the USD and provide some impetus to the USD/CAD pair. Apart from this, traders will take cues from oil price dynamics to grab some short-term opportunities.

Technical levels to watch