USD/CAD remains on the defensive below 1.3400, downside seems limited amid stronger USD

• USD/CAD turns lower for the second straight day, albeit lacks follow-through selling.
• Bullish crude oil prices underpin the Loonie and act as a headwind for the major.
• Broad-based USD strength lends some support ahead of important US macro data.

The USD/CAD pair attracts some sellers following an early uptick to the 1.3410 area dips into negative territory for the second straight day on Wednesday. The pair is currently placed near the daily low, around the 1.3380 region, and looks to extend the previous day's pullback from the weekly top.

Crude oil prices stand tall near the monthly peak amid optimism over a recovery in Chinese fuel demand. This, in turn, underpins the commodity-linked Loonie and acts as a headwind for the USD/CAD pair. That said, a combination of factors should help limit deeper losses for the major and warrants some caution before placing aggressive intraday bearish bets.

Worries about a deeper global economic downturn might cap crude oil prices, which, along with a sharp deceleration in Canadian consumer inflation, could act as a headwind for the Canadian Dollar. Apart from this, resurgent US Dollar demand, bolstered by the Bank of Japan-inspired sell-off in the Japanese Yen, should further lend support to the USD/CAD pair.

The USD rally, meanwhile, is likely to run out of steam amid a fresh leg down in the US Treasury bond yields, weighed down by growing acceptance that the Fed will soften its hawkish stance. In fact, the current market pricing points to a greater chance of a smaller 25 bps Fed rate hike move in February, which should keep a lid on the greenback.

The aforementioned fundamental backdrop, along with repeated failures to find acceptance above the 1.3400 mark, favour bearish traders. That said, it will still be prudent to wait for strong follow-through selling below mid-1.3300s before positioning for any further depreciating move as traders now look to important US macro data for a fresh impetus.

Wednesday's US economic docket highlights the release of the Producer Price Index (PPI) and monthly Retail Sales figures, due later during the early North American session. Apart from this, the US bond yields might influence 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