USD/CAD remains depressed amid weaker USD, softer oil prices to limit losses

• USD/CAD struggled to capitalize on the overnight gains amid modest USD weakness.
• Retreating US bond yields turned out to be a key factor that weighed on the buck.
• A softer tone around oil prices undermined the loonie and helped limit deeper losses.

The USD/CAD pair remained on the defensive through the early North American session and was last seen trading with modest intraday losses, just below the 1.2700 mark.

A sharp pullback in the US Treasury bond yields, along with the risk-on impulse prompted some selling around the safe-haven US dollar. This, in turn, failed to assist the USD/CAD pair to capitalize on the overnight bounce from the 1.2450 support area. The downside, however, remains cushioned in the wake of a fresh leg down in crude oil prices, which tend to undermine the commodity-linked loonie.

Apart from this, expectations that the Fed would adopt a more aggressive policy response to contain stubbornly high inflation acted as a tailwind for the greenback and the USD/CAD pair. In fact, the markets have been pricing in the possibility of a 50 bps Fed rate hike move in March. Hence, the focus will remain glued to the release of the latest US consumer inflation figures on Thursday.

On the other hand, the Canadian dollar was pressured by softer crude oil prices. Traders opted to lighten their bullish bets around the commodity amid expectations that the revival of the 2015 nuclear deal could return more than 1 million barrels per day of Iranian oil in the markets. This, in turn, was seen as another factor that should extend support to the USD/CAD pair and limit losses.

In the absence of any major market-moving economic releases, the US bond yields will drive the USD demand. Traders will further take cues from the official report on the US crude inventories by Energy Information Administration, which will influence oil price dynamics. This, along with the Bank of Canada Governor Tiff Macklem's speech should provide some impetus to the USD/CAD pair.

Technical levels to watch