A week driven by volatility, half year end real money flow and pessimistic sentiment, Asia EM FX continues to be the underperformer. As I mentioned last week, Emerging Markets Asia countries accepted the fate that USD will continue to appreciate against their currencies. Prediction of US dollar strength against Asia currencies was a right call. At the beginning of the week, Taiwan dollar did well against USD before half year ended then spiked up to 29.8. This is in fact due to exporters and other real money players finished hedging their positions. In the short and medium term, Taiwan dollars will continue to do poorly against USD with further expectation of equity outflow.

Southeast Asia countries currencies also do poorly against US dollar. India Rupee, Indonesia Rupiah and Philippines Peso all reach multiyear low against US dollar. Growth concern of EM countries became more serious when the US market is repricing on probability of recession. After last rate hike of 75 basis points by Federal Reserves, market was expecting 75% chance of another 75-basis point hike in July. Now it is only 50/50 between 50 basis points or 75 basis points hikes. I stated that recession will be sooner than market thinks and market seems to follow what I believe in. Investors are expecting that the Feds will cut interest rate again mid-2023. Sentiment changes globally with fear of recession. Investors confidence are at low point, and I believe the recession will be within a few months.

Recession is a certainty, while there are questions that investors should be thinking: 1. Will this recession become depression and whether weaken demand will drive inflation downwards? 2. Will this cause a credit crisis and expect a lot of default in housing and auto loan markets? 3. How bad is Asia being infected compared to 2008? I don’t have a crystal ball but I am relatively more confident in the third question. Asia economy has already dramatically sized compared to 2008 and I expect the impact from US should be less than last time. However, I also believe that housing market and auto loan defaults will skyrocket as well. The issue is this time Federal Reserves cannot keep printing money due to inflation and the main street will suffer even more compared to last time. For the first question, I really do not know as I cannot gauge geopolitical issues clearly but I do believe supply side issue cannot be fixed quickly especially a lot of the inflation issue is related to food supply.

S&P is already down 20% half year. Based on history, we should expect a rebound in second half, but last time was 1970s without helicopter money. My final advise is that investors can only sit tight and be nimble. In such environment, a senior trader recently always says this is a new normal. It is a different world and something all young investors never experienced. Tough life but opportunities always arise.