USD/CAD retreats from one-week high, still well bid around 1.3430-35 region

• USD/CAD climbs to a one-week high and draws support from a combination of factors.
• Bearish oil prices undermine the Loonie and act as a tailwind amid modest USD strength.
• Bets for less aggressive Fed rate hikes cap the greenback and any further gains for the pair.

The USD/CAD pair builds on Friday's positive move and gains some follow-through traction on the first day of a new week. Spot prices, however, trim a part of intraday gains to a one-week high and retreat below mid-1.3400s during the early European session.

Investors remain worried that the worsening COVID-19 situation in China will dent fuel demand in the world's top crude importer. This, in turn, drags crude oil prices to a fresh YTD low and undermines the commodity-linked Loonie. Apart from this, a modest US Dollar strength - bolstered by the cautious mood - offers some support to the USD/CAD pair.

A wave of protests in China over the government’s zero-COVID policy adds to concerns about a deeper economic downturn and tempers investors' appetite for riskier assets. This is evident from a generally weaker tone around the equity markets and drives haven flows towards the USD. That said, retreating US Treasury bond yields keeps a lid on the greenback.

The global flight to safety, along with the prospects for a less aggressive policy tightening by the Fed, continue to exert downward pressure on the US bond yields. In fact, a dovish assessment of the November FOMC meeting minutes released last week reaffirmed market bets for a relatively smaller 50 bps lift-off at the next FOMC policy meeting in December.

This, in turn, holds back traders from placing aggressive bullish bets around the USD and caps gains for the USD/CAD pair, at least for the time being. Spot prices retreat over 40 pips from the daily high, though have managed to hold comfortably above the 1.3400 mark as traders now look to speeches by influential FOMC members for short-term opportunities.

Technical levels to watch