Forex alert: Lower yields amid escalating trade tensions aren’t signalling a sigh of relief

Asia wrap

Asian markets are trading mixed today, but pockets of optimism emerge as DeepSeek fever spreads across China with Beijing’s full backing. The AI start-up models are being rapidly integrated into state-owned enterprises, hospitals, and local governments, and China’s tech-savvy workforce isn’t wasting any time driving adoption.

Since DeepSeek’s R1 model shook global markets in late January, its deployment across China has been nothing short of lightning-fast. Beijing is pulling out all the stops, consolidating its gains in generative AI, and positioning DeepSeek as its new national AI champion.

The adoption wave isn’t limited to tech giants—China’s largest cloud service providers, at least six automakers, local governments, major hospitals, and key SOEs have joined the party. The real eye-opener? Even traditionally conservative institutions are moving quickly, a testament to the disruptive potential DeepSeek is bringing to the table.

The AI revolution in China isn’t just a stock market play anymore. The low-cost deployment of DeepSeek’s models is fueling its rapid spread, and with founder Liang Wenfeng securing a meeting with President Xi Jinping this month, momentum is only building.

The question is: How far does this AI wave reach, and who gets left behind?

Forex markets

The dollar is firming up as trade policy jitters take center stage, with investors bracing for more tariff turbulence from Washington. While broader risk sentiment remains fragile, growing anxiety over the next wave of U.S. trade actions keeps safe-haven flows anchored in the greenback.

Markets are increasingly recalibrating for a more aggressive trade stance under Trump 2.0, with the March 4 deadline for tariffs on Canada and Mexico inching closer, followed by the March 12 steel and aluminum measures and a potential full-scale tariff escalation in April. The timeline is stacking up fast, and the FX market is noticing.

Adding fuel to the fire, bond yields remain under pressure, reflecting investor concerns that the trade war premium is morphing from an inflation risk into a growth risk. Lower yields amid rising trade tensions signal that markets aren’t buying into an immediate reflationary shock—instead, they’re hedging against a broader economic slowdown.

The dollar remains the go-to safety valve as traders weigh the potential fallout from escalating tariffs, retaliatory measures, and shifting global trade dynamics. But with the yen also catching bids, today’s focus is on how aggressively risk-off flows drive USD/JPY, CNH/JPY, and other trade war-sensitive crosses.

The playbook? Follow the tariff headlines—once policy turns into action, the FX market won’t wait to reprice.

Some analysts and traders are misreading the trade war tea leaves, wrongly correlating the diminishing trade war premium with falling yields. The trade war premium is alive; it’s just wearing a different mask. Lower yields amid escalating trade tensions aren’t signalling a sigh of relief—quite the opposite. Markets are bracing for a global slowdown, not an immediate inflation spike.

But here’s where it gets messy—if inflation fears take the wheel later and yields surge instead, it’s just a different kind of poison. Either way, the outcome isn’t market-friendly,

For traders not already positioned in the trade war crosses—think short CNH/JPY, EUR/JPY, or CAD/JPY—this is one to keep on the radar today. The yen typically thrives in this type of environment, and if the market starts pricing in a more profound growth scare, the JPY safe-haven bid should only strengthen; hence, we could see a test of USD/JPY 148.50-60 strong support zone. But as usual, keep an eye on bonds as this script could flip