Good morning
China’s AI start-up DeepSeek story was in the news last week, but the market reaction was left to yesterday. US tech stocks fell sharply as markets digested the potential impact of Deepseek’s inexpensive large language model models. Deepseek’s models are gaining significant attention for several reasons. First, the efficiency of its training and also running them relative to other existing frontier models including from the likes of OpenAI, and as such at a fraction of the cost. Second, the quality of its output, with its models outperforming or close to matching the more sophisticated ones from US tech companies. Third, the innovativeness by which Deepseek was able to incorporate so called “Chain of Thought” AI models. This is akin to a human reasoning out its thought and analytical process rather than providing the first intuitive and gut-feeling answer, and in so doing, providing a more efficient process in generating responses.
Nothing to suggest at this juncture that there is follow-through to come, although the notion of overvalued tech stocks is not a tough one to sell. For Treasuries, yields are back at around 4.5% in the 10-yr, and still looking down. From an FX perspective, one big driver of the strong US Dollar has been “US exceptionalism” not least in the technology space, and whether this continues could have important impact and in the midst of elevated valuations of the US Real Effective Exchange rate.
US Treasury Secretary Scott Bessent was confirmed by the Senate, and the Financial Times reported that he is backing universal tariffs on imports to start at 2.5%, with the levies rising month by month in order to give businesses time to adjust. Meanwhile, President Trump said that there will be tariffs in the “near future” on foreign pharmaceuticals, semiconductors, and metals in order to bring production and manufacturing back to the US, even as he called DeepSeek’s progress good and a wake-up call for US industries to compete.
The tech-sector sell-off favoured traditional safe haven currencies like the JPY and CHF. This week, market focus is likely to remain on developments from the Trump administration, overshadowing both the FOMC and ECB meetings, where major surprises appear unlikely.
It is getting busier on the data side with the US releasing durable goods orders and the Conference Board’s consumer confidence index. The European Central Bank will release its latest bank lending survey.
The USD index climbed 0.6% in Asian trading to 107.91. While the Fed is widely expected to hold rates steady this week, its commentary on inflation and future rates will be critical for currency markets.
EUR/USD got off to a strong start during yesterday's session briefly breaching the 1.0500 mark, as easing tariff risk premia has fuelled broad-based USD weakness. However, notable USD safe-haven demand since has seen the pair come under renewed selling pressure with the pair opening the European session below $1.0450.
GBP/USD pair also under pressure below $1.2450
The Japanese Yen remains on the back foot against the greenback, with the USD/JPY eyeing the 156.00 level
Asian currencies are likely to remain under pressure in the near term, not just due to news surrounding Deepseek and the weakness of the US equity markets, but also because of tariff uncertainties overshadowing regional fundamentals. AUD (-0.6%), IDR (-0.7%), SGD (-0.6%), THB (-0.3%) during the Asian session.
The Chinese yuan’s offshore pair USD/CNH jumped 0.5% to 7.2782, reflecting ongoing pressure from U.S. tariff threats. Onshore markets were shut for the Lunar New Year holiday.
Meanwhile, India’s central bank plans to inject nearly USD18bn into the financial system in order to ease a liquidity shortage in part due to capital outflows and also RBI FX intervention operations to support the Indian Rupee since last year. USD/INR edged marginally higher to 86.461.
| Interest Rate Swaps | EUR | USD | GBP |
| 3Y | 2.39 | 4.02 | 4.07 |
| 5Y | 2.42 | 4.03 | 4.01 |
| 10Y | 2.50 | 4.07 | 4.06 |
