USD/CAD hangs near daily low, downside seems cushioned amid retreating oil prices

• USD/CAD witnessed some selling on Tuesday amid modest USD weakness.
• Retreating oil prices could undermine the loonie and extend some support.
• Rallying US bond yields should act as a tailwind for the USD and the major.

The USD witnessed some selling during the first half of the European session and dragged the USD/CAD pair to a fresh daily low, around the 1.2710 region in the last hour.

Following an early uptick to the 1.2750 area, the USD/CAD pair met with a fresh supply on Tuesday and moved further away from over one-week high touched the previous day. A positive turnaround in the global risk sentiment weighed on the safe-haven US dollar, which, in turn, was seen as a key factor exerting pressure on the USD/CAD pair.

In the latest geopolitical developments, Russia said that several military drills have finished and some troops have started returning to bases. The headlines helped ease worries about a significant military action/confrontation and triggered a solid rebound in the equity markets, forcing investors to dump traditional safe-haven assets.

The risk-on impulse, along with the prospects for a faster policy tightening by the Fed pushed the yield on the benchmark 10-year US government bond back above the 2.0% mark. This should help limit the USD losses. Apart from this, a sharp pullback in oil prices could undermine the commodity-linked loonie and lend support to the USD/CAD pair.

The fundamental backdrop suggests that the path of least resistance for the pair is to the upside and warrants some caution for aggressive bearish traders. Hence, any subsequent slide might still be seen as an opportunity to initiate bullish positions around the USD/CAD pair and remain cushioned, at least for the time being.

Market participants now await the release of the US Producer Price Index (PPI) for January, due later during the early North American session. This, along with the US bond yields, should influence the USD demand. Apart from this, traders will take cues from oil price dynamics to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch