NZD/USD drops to near 0.6320 at open as focus shifts to PBOC rate decision

• NZD/USD has slipped to near 0.6320 as the US warning for China on providing support to Russia has dampened the market mood.
• Investors are keenly waiting for the interest rate decision by the PBoC ahead.
• The RBNZ's Shadow Board recommended a 50bps OCR increase citing strong inflationary pressures.

The NZD/USD pair has dropped to near 0.6320 in the opening session on Monday as the market sentiment has got heated. The warning from the US ambassador to the United Nations, Ambassador Linda Thomas-Greenfield, on Sunday that China would cross a “red line” if the country decides to provide lethal military aid to Russia for its invasion of Ukraine, is turning investors risk averse.

S&P500 ended the week with some losses as investors are worried about the economic recovery in the United States after higher-than-anticipated US inflation indicators. And, now the geopolitical tensions could dampen the market mood further. Investors should be aware that the US markets will be closed on Monday on account of Presidents Day.

The US Dollar Index (DXY) displayed a sheer sell-off on Friday as investors shrugged off concerns about a revival in the US inflation concerns. The release of the higher-than-projected US CPI data was followed by higher Producer Price Index (PPI) and Retail Sales data. The annual wholesale inflation scaled to 6.0% versus the consensus of 5.4%. Meanwhile, monthly Retail Sales data climbed to 3.0% against the former release of 1.8%, which cleared that consumer spending is recovering firmly.

On Monday, investors will keep eye on the release of the interest rate decision by the People’s Bank of China (PBoC). A Reuters poll published on February 17 showed that 8 out of 10 economists expect the PBoC to leave the Loan Prime Rate (LPR) unchanged at 3.65%. It is worth noting that New Zealand is one of the leading trading partners of China and an unchanged interest rate policy will result in more business for New Zealand and more support for the New Zealand Dollar.

This week, the release of the interest rate decision by the Reserve Bank of New Zealand (RBNZ) will be the key event. The RBNZ's Shadow Board recommended a 50bps Official Cash Rate (OCR) increase this morning citing strong inflationary pressures.