South Korea has been operating above capacity, at least on the industrial side in H1 2011, and has above-target inflation and wobbling inflation expectations. It is expected to reverse policy abruptly as the economy flirts with, but avoids, recession around the turn of the year. Our forecast for GDP in 2012 has been cut to 3.4% (from 4.6%). Despite CPI inflation remaining above 4% y/y until early 2012 and policy rates, at 3.25%, still some 75-100bp below neutral, 50bp of rate cuts around the turn of the year are targeted. Business surveys have already dropped to rate-cutting territory (Chart 3). The KRW's recent plunge, especially versus the JPY, will also provide support. As with China, there is ample room for an easing of fiscal policy, which is likely to be pursued aggressively if recession risks intensify.

Most ASEAN economies, however, are much less exposed to a downturn in the US and Europe. Indonesia, which, along with India, has the lowest direct trade exposure to the US and Europe, in expected to remain resilient, with steady GDP growth above 6% in both 2011 and 2012, and inflation holding below 6% in both years. Policy is seen on hold until well into 2012, with the lower IDR providing support in the short term. Thailand's central bank has been one of the most proactive in normalising policy, with eight successive rate hikes up to August, but it is also seen holding policy rates given its relatively high export exposure to the US and the new government's planned fiscal expansion.

Eoin Treacy's view Most Asian markets gave in to selling pressure later than those in Europe and North America and subsequently took longer to begin to find support. The Asian Dollar Index can be considered a barometer for risk appetite in the region. Its sharp decline in September was reflective of widespread deleveraging. The Index found at least short-term support three weeks ago in the region of the 2008 peak and it continues to unwind the short-term oversold condition.

Technical damage has been sustained and it will take time to convince investors that demand has returned to dominance beyond the short-term. Here is a list of what we can expect if the low posted on September 22nd is a medium-term nadir:

1. The Index will continue to find support at progressively higher levels following pullbacks. The most recent is close to 114.5.
2. It will continue to hit higher recovery highs on rallies.
3. It will hold a push back above the 200-day MA. The MA is currently at 117.
4. It will reaffirm the overall uptrend by sustaining a move to new highs.

The most likely scenario is a continued rally to unwind the short-term oversold condition. There will not be substantive evidence that a medium-term low has been reached until a move is sustained above the MA. In the short-term the benefit of the doubt can probably be given to the upside.

Indonesia has bounced back to test the lower side of the MA and a sustained move above it would increase potential for a reassertion of the medium-term. The Philippines has a similar pattern. Thailand experienced a deeper decline but is bouncing. Malaysia has a similar pattern to Thailand.

Singapore found at least short-term support in the region of 2500 last week and continues to unwind the short-term oversold condition. A sustained move above 3000 will be required to indicate a return to medium-term demand dominance. The Hang Seng is also rallying to at least unwind the short-term oversold condition. Taiwan and South Korea have similar patterns.

India's Nifty Index was one of the first to peak, almost a year ago, and has been ranging around 5000 since late August. It has firmed of late and a clear downward dynamic would be required to question current scope for some additional upside.

China's Shanghai A-share Index has been one of the worst performers globally over the last 18 months. At a P/E of 12.92 and dividend yield of 2% valuations are at levels where rallies have been initiated in the past. The Index posted an upside key reversal today and a countermanding downward move would be required to offset current scope for at least an unwind of the short-term oversold condition.