Did God allow Israel to make a covenant or show mercy to the Canaanite nations?
No. Through Moses, God commanded Israel that when He delivered the seven nations—Hittites, Girgashites, Amorites, Canaanites, Perizzites, Hivites, and Jebusites—into their hands, they were to utterly destroy them and make no covenant, treaty, or show mercy to them. Intermarriage was also forbidden.
Les teaches that Deuteronomy 7 deals with the here and now as Israel is about to enter and occupy the land of Canaan. Moses gives strict commands from God. God says He will cast out many nations before them, seven nations greater and mightier, and when He delivers them, Israel is to smite and utterly destroy them. Les explains that God is not being cruel or unkind; He will show why He gives these instructions. Israel was to make no covenant or treaty with them, nor show mercy, nor make marriages with them, because such marriages would turn their sons away from following the Lord. They had already been guilty of some of this, so God made it plain they were to have nothing to do with these Canaanites they were going to run into.
And when the LORD thy God shall deliver them before thee; thou shalt smite them, and utterly destroy them; thou shalt make no covenant with them, nor shew mercy unto them: