USD/CAD slides to 1.3100 neighbourhood, downside potential seems limited

• USD/CAD retreats further from a multi-week high and is pressured by a combination of factors.
• Rebounding crude oil prices underpin the loonie and prompt some selling amid a weaker USD.
• The intraday USD selling picks up pace following the release of the mixed US monthly jobs data.
• Hawkish Fed expectations, recession fears to limit the USD losses and lend support to the pair.

The USD/CAD pair extends its steady intraday descent and drops to the 1.3115-1.3110 area, or a fresh daily low during the early North American session. Spot prices retreat further from the highest level since July 14 touched the previous day and for now, seem to have snapped a three-day winning streak.

A goodish recovery in crude oil prices underpins the commodity-linked loonie. This, along with a broad-based US dollar weakness, prompts some selling around the USD/CAD pair on Friday. The USD retracement slide from a two-decade high set on Thursday picks up pace following the release of the mixed US monthly jobs report. Apart from this, an intraday decline in the US Treasury bond yields and the risk-on impulse exert additional downward pressure on the safe-haven greenback.

That said, a combination of factors should help limit deeper losses for the USD/CAD pair and warrant some caution before placing aggressive bearish bets. Investors remain concerned that a deeper global economic downturn and fresh COVID-19 lockdown would dent fuel demand, which should act as a headwind for crude oil prices. Apart from this, expectations that the Fed will stick to its aggressive policy tightening path should limit the USD downfall and lend support to the major.

In fact, the markets are still pricing in a greater chance of a supersized 75 bps rate hike move at the next FOMC monetary policy meeting on September 20-21. This, in turn, favours the USD bulls and supports prospects for the emergence of some dip-buying around the USD/CAD pair. Hence, it will be prudent to wait for a strong follow-through decline before confirming that the recent strong move up witnessed over the past three weeks or so has run out of steam and positioning for further losses.

Technical levels to watch