USD/CAD corrects from multi-year tops, slips below mid-1.3800s amid rallying oil prices

• Rebounding oil prices underpinned the loonie and prompted some profit-taking.
• USD/CAD retreats over 120 pips from Asian session swing high to mid-1.3900s.
• The USD bulls failed to capitalize on a strong recovery in the US bond yields.

The USD/CAD pair dropped to fresh session lows, around the 1.3825 region in the last hour and eroded a major part of the overnight gains to over four-year tops.

The pair witnessed an intraday turnaround and retreated around 120 pips from the Asian session swing highs to mid-1.3900s amid a goodish rebound in oil prices, which underpinned demand for the commodity-linked currency – the loonie.

A coordinated effort by the Federal Reserve and Bank of Japan helped calm investors’ nerves on Friday. This was evident from a turnaround in the global risk sentiment and triggered a strong recovery in crude oil prices – now up over 4.5% for the day.

It is worth reporting that the Fed on Thursday announced that it will inject more than $1.5 trillion of temporary liquidity into the short-term funding markets. This was followed by the BoJ's move on Friday to inject 500 billion yen into the system.

The risk-on flow was further reinforced by a solid bounce in the US Treasury bond yields. The US dollar, however, failed to capitalize on rallying bond yields and witnessed a subdued trading action, which further contributed to the pair's pullback from highs.

It will now be interesting to see if the current pullback marks the onset of a near-term corrective slide or the pair is able to find any buying interest at lower levels amid persistent worries over the coronavirus outbreak, which might benefit the greenback's status as the global reserve currency.

Technical levels to watch