USD/CAD trades with modest losses, downside seems limited

• A modest USD weakness prompted some selling around USD/CAD on Thursday.
• Retreating oil prices could undermine the loonie and help limit losses for the pair.
• Bears might wait for a sustained break below weekly lows before placing fresh bets.

The USD/CAD pair edged lower during the early European session and dropped to fresh daily lows, around the 1.2565 region in the last hour.

The pair extended the previous day's retracement slide from mid-1.2600s, or weekly tops and witnessed some selling during the first half of the trading action on Thursday. The risk-on impulse in the markets weighed on the safe-haven US dollar, which, in turn, was seen as a key factor exerting some pressure on the USD/CAD pair.

The global risk sentiment witnessed a dramatic turnaround after Russian leaders reassured Europe on gas supplies. Adding to this, the top US Senate Republican Mitch McConnell said that his party would allow an extension of the federal debt ceiling into December to avert a federal debt default and further boosted investors' confidence.

A modest uptick in the US Treasury bond yields did little to impress bullish traders, though prospects for an early policy tightening by the Fed should help limit the USD losses. Investors seem convinced that the Fed would begin tapering its bond purchases by the end of 2021 and have also started pricing in the possibility of a rate hike in 2022.

Apart from this, a follow-through pullback in crude oil prices from seven-year tops could undermine the commodity-linked loonie and extend some support to the USD/CAD pair. Oil prices remained under pressure for the second successive day after an unexpected rise in US stockpiles raised concerns over demand after the recent runaway rally.

This makes it prudent to wait for some follow-through selling below the 1.2550-45 region (weekly lows) before positioning for any further depreciating move. Market participants now look forward to the release of the usual Weekly Initial Jobless Claims data from the US for some impetus later during the early North American session.

Apart from this, the broader market risk sentiment and the US bond yields, might influence the USD and produce some trading opportunities. Investors will further take cues from a scheduled speech by the Bank of Canada Governor Tiff Macklem and oil price dynamics ahead of the closely-watched monthly jobs reports from the US (NFP) and Canada on Friday.

Technical levels to watch