USD/CAD climbs to 1.2400 neighbourhood amid a pickup in USD demand

• A modest USD strength assisted USD/CAD to stage a modest bounce from over three-month lows.
• Hawkish Fed expectations elevated US bond yields, the cautious marked mood benefitted the USD.
• Bullish crude oil prices might underpin the loonie and keep a lid on any meaningful gains for the pair.

The USD/CAD pair bounced around 40 pips from the Asian session lows and was last seen hovering near the top end of its intraday trading range, around the 1.2385-90 region.

Having shown some resilience below mid-1.2300s, the USD/CAD pair attracted some buying on the first day of a new week and for now, seems to have snapped four successive days of the losing streak. The uptick allowed the pair to move away from over three-month lows touched on Friday and was sponsored by a modest US dollar strength.

The USD drew some support from elevated US Treasury bond yields, which remained well supported by the prospects for an early policy tightening by the Fed. The market expectations were reaffirmed by Friday's upbeat US monthly Retail Sales figures, while unexpectedly rose 0.7% in September as against a 0.2% decline anticipated.

The markets also seem to have started pricing in the possibility of an interest rate hike in 2022 amid worries that the recent widespread rally in commodity prices will stoke inflation. Apart from this, the prevalent cautious mood around the equity markets was seen as another factor that benefitted the greenback's safe-haven status.

Against the backdrop of fears about a faster than expected rise in inflation, a sharp deceleration in the Chinese economic growth fueled concerns about the return of stagflation. In fact, the world's second-largest economy recorded a modest 0.2% growth during the third quarter and the yearly rate fell to 4.9% from 7.9% previous.

This, in turn, kept a lid on the optimism and dented investors' appetite for perceived riskier assets. That said, an extension of the recent bullish run in crude oil prices to fresh multi-year tops might continue to underpin the commodity-linked loonie. This, in turn, should keep a lid on any strong gains for the USD/CAD pair.

Market participants now look forward to the release of US Industrial Production data for some impetus later during the early North American session. This, along with US bond yields, might influence the greenback. Traders will further take cues from oil price dynamics for some short-term opportunities around the USD/CAD pair.

Technical levels to watch