USD/CAD inter-markets: retracement in oil could trigger a short-covering bounce

The USD/CAD pair remained under selling pressure for sixth consecutive trading session and is currently trading around its lowest level since July 15, within striking distance of 1.2900 handle. 

Last week, the pair was driven lower by strong CAD demand induced by sharp recovery in crude oil, which continues to gain traction on fresh hopes for a production freeze after Saudi Arabia’s energy minister Khalid al-Falih last week showed readiness to take action in order to bring back stability in the oil market. The 14-member oil cartel, OPEC, is scheduled to meet at an informal gathering late next month.

Adding to this, the recent slew of weaker US economic data has contributed to fading prospects of an eventual Fed rate-hike action by the end this year, as depicted by FedFund watchtool that points to less that 40% probability of such an action in December. However, Wednesday's release of FOMC meeting minutes would provide fresh impetus over the Fed's near-term monetary policy outlook.

However, recovery in the US and Canadian 10-years Treasury bond yields have not been supportive of the recent slide, suggesting that the ongoing depreciating move is solely driven by the ongoing bullish momentum in oil prices. 

Hence, even a minor retracement in oil prices could trigger a near-term short-covering bounce, helping the pair to stage a minor recovery initially towards 1.2970 level and eventually towards 1.3000 psychological mark.