USD/CAD flirts with session lows, below 1.2700 mark

• A combination of factors prompted some selling around USD/CAD on Monday.
• Retreating US bond yields, the risk-on mood weighed on the safe-haven USD.
• Bullish oil prices underpinned the loonie and added to the intraday selling bias.

The USD/CAD pair lost some additional ground during the early European session and refreshed daily lows, around the 1.2675 region in the last hour.

The pair struggled to capitalize on last week's solid rebound from multi-year lows and once again started retreating from the 1.2745-50 supply zone. The pullback was sponsored by a softer tone surrounding the US dollar and a fresh leg up in crude oil prices, which tends to underpin the commodity-linked loonie.

The US Treasury bond yields retreated further from over one-year tops touched last week, which, in turn, was seen as a key factor that kept the USD bulls on the defensive. Apart from this, a strong rally in the equity markets further dented the greenback's relative safe-haven status and exerted some pressure on the USD/CAD pair.

On the other hand, the Canadian dollar benefitted from bullish crude oil prices, which rallied over 1.5% in reaction to the passage of a massive US fiscal spending plan in the House of Representations. The US President Joe Biden's $1.9 trillion pandemic relief package will now move to the US Senate for further deliberation.

Meanwhile, the reflation trade has been fueling expectations for an uptick in inflation and has been fueling doubts that the Fed would retain ultra-low rates for a longer period. This, in turn, extended some support to the US bond yields and helped limit any meaningful slide for the USD, warranting some caution for bearish traders.

This makes it prudent to wait for some strong follow-through selling before confirming that the recent bounce has run out of steam and positioning for the resumption of the prior depreciating trend. Monday's release of the US ISM Manufacturing PMI might influence the USD and produce some trading opportunities around the USD/CAD pair.

Technical levels to watch