USD/CAD drops to fresh multi-week low, further below 1.3400 amid weaker USD/rallying oil prices

• USD/CAD drops to a seven-week low on Monday and is pressured by a combination of factors.
• An intraday rally in crude oil prices underpins the Loonie and exerts pressure amid a weaker USD.
• Diminishing odds for more aggressive Fed rate hikes and the risk-on mood weigh on the buck.

The USD/CAD pair remains under heavy selling pressure for the second straight day and drops to its lowest level since late November heading into the North American session on Monday. The pair is currently placed around the 1.3380-1.3375 region, down nearly 0.50% for the day, and is pressured by a combination of factors.

The Canadian Dollar continues to draw support from Friday's upbeat domestic employment details, which raised expectations for additional rate hikes by the Bank of Canada. Adding to this, a strong intraday rally of over 3% in crude oil prices, bolstered by China’s biggest pivot away from its strict zero-COVID policy, underpins the commodity-linked Loonie. This, along with sustained US Dollar selling bias, contributes to the offered tone surrounding the USD/CAD pair and the ongoing downward trajectory.

The mixed US monthly jobs report (NFP) and the disappointing release of the US ISM Services PMI on Friday lifted bets for a less aggressive policy tightening by the Fed. In fact, the markets are now pricing in a 25 bps Fed rate hike move in February, which is reinforced by a further decline in the US Treasury bond yields. Furthermore, a generally positive tone around the equity markets is also seen denting the greenback's relative safe-haven status and exerting additional pressure on the USD/CAD pair.

That said, worries about a deeper global economic downturn keep a lid on the optimism in the markets, which could help limit losses for the USD. Nevertheless, the USD/CAD pair confirms a bearish breakdown below a technically significant 100-day SMA. Moreover, a subsequent slide below the 1.3400 mark could be seen as a fresh trigger for bearish traders. In the absence of any relevant market-moving macro data, either from the US or Canada, this supports prospects for a further depreciating move for the pair.

Technical levels to watch