USD/CAD remains depressed near mid-1.3700s amid rising oil prices, modest USD weakness

The USD/CAD pair kicks off the new week on a downbeat note and erodes a part of Friday's strong gains to its highest level since May 2020. The pair maintains its offered tone through the early European session and is currently trading around the 1.3755 region, just a few pips above the daily low.

Reports that OPEC+ will consider an output cut of 1.5 million bpd (or more) - the biggest since the COVID-19 pandemic - at its meeting on Wednesday lifts crude oil prices to over a one-week high. This, in turn, underpins the commodity-linked loonie and exerts downward pressure on the USD/CAD pair amid a softer tone surrounding the US Treasury bond yields.

In fact, the USD Index - which measures the greenback's performance against a basket of currencies - languishes near a one-week low touched on Friday and is pressured by a combination of factors. The US Treasury bond yields retreat further from over a multi-year high touched last week, which along with a positive risk tone, weighs on the safe-haven buck.

That said, the Federal Reserve’s commitment to getting inflation under control and expectations for a more aggressive policy tightening should act as a tailwind for the greenback. The markets have been pricing in the possibility of another supersized 75 bps Fed rate hike move at the November meeting. This, in turn, favours the USD bulls.

Furthermore, investors remain worried that a deeper global economic downturn will dent the fuel demand. This could keep a lid on any meaningful upside for crude oil prices. The fundamental backdrop suggests that the path of least resistance for the USD/CAD pair is to the upside and supports prospects for the emergence of fresh buying at lower levels.

Market participants now look to the US economic docket, featuring the release of ISM Manufacturing PMI, due later during the early North American session. This, along with the US bond yields and the broader risk sentiment, will drive the USD demand. Traders will further take cues from oil price dynamics to grab short-term opportunities around the USD/CAD pair.

Technical levels to watch