[AndrewWoo]

Over the past two weeks, Chinese stockmarkets have been knocked around by speculation that Chinese policymakers will introduce measures to rein in excessive liquidity. Over the weekend, the FT ran an article that the PBoC has told the heads
of the largest state-con trolled institutions to slow the pace of new lending. Economists continue to expect Beijing will retain an accommodative policy stance for the rest of the year, but the Shanghai Composite looks shaky after a near on vertical ascent. The 2 week percentage change has shifted from +7.7% to -1.8%
in less than two weeks. Below graph shows the correlation between the 2 week percentage change in the Shanghai Composite and AUD/JPY, highlighting downside risk.

[AndrewWoo]

AUD has had a spectacular rally in the past month on the back of increasing interest rate expectations in Australia, rising commodity prices and resurgent yield related demand from Japanese retail investors. While market is bullish AUD over the medium term, market fair value model suggests that much of the good news for AUD for the near term has been discounted. Consequently, risks are skewed heavily toward the downside in the next few weeks. In particular, AUD/USD has scope to test below 0.80 (spot~0.8360) and a collapse in planned Toshin issuance over August suggests AUD/JPY could selloff toward 73.00 (spot~81.30).