NZD/USD seems vulnerable around mid-0.5600s amid US-China trade tensions

• NZD/USD attracts some sellers for the third straight day amid US-China trade war concerns. 
• China's inflation figures released over the weekend fail to provide any respite to the Kiwi.
• The divergent Fed-RBNZ expectations support prospects for a further depreciating move. 

The NZD/USD pair drops to a four-day low during the Asian session on Monday, though it rebounds a few pips in the last hour and currently trades around mid-0.5600s. Spot prices, however, keep the red for the third straight day and remain vulnerable to sliding further amid worries about US-China trade tensions. 

In fact, the additional US levy on China went into effect last week, while China's retaliatory tariffs on some US exports kicked off this Monday. Adding to this, US President Donald Trump said on Sunday that he will announce additional 25% tariffs on all steel and aluminum imports into the US, and will also announce reciprocal duties over what he sees as unfair trading practices. This raises the risk of a further escalation of trade war between the world's two largest economies and weighs on investors' sentiment, underpinning the safe-haven US Dollar (USD) and denting demand for the perceived riskier Kiwi. 

Meanwhile, the latest development fuels worries that Trump's protectionist policies would put upward pressure on inflation in the US. This comes on top of the upbeat US monthly employment details released on Friday and could limit the scope for the Federal Reserve (Fed) to ease policy further. In fact, traders are now pricing in the possibility of just a 36 basis point rate cut by the Fed this year. This, to a larger extent, overshadows data showing that consumer inflation in China grew 0.7% month-on-month in January - its fastest rise in eleven months - compared to a flat reading in the previous month. 

However, factory-gate prices continued their downward trajectory, highlighting persistent deflationary pressures in the industrial sector. This, along with the increasing likelihood that the Reserve Bank of New Zealand (RBNZ) will deliver a third consecutive supersized rate cut later this month, suggests that the path of least resistance or the NZD/USD pair remains to the downside. Hence, any attempted recovery could be seen as a selling opportunity and run the risk of fizzling out quickly. The focus now shifts to Fed Chair Jerome Powell's semi-annual congressional testimony on Tuesday and Wednesday.