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There was a lively start to trading as the yen gapped lower in immediate response to news of the LDP's victory in the weekend elections in Japan. The greenback traded around JPY84.55, the highest level since April 2011. The euro traded to about JPY111.30, just below the year's high set in March near JPY111.45. The Nikkei gapped higher.

However, as the results were largely as expected. The LDP and its traditional ally, the New Komeito secured a 2/3 majority, which will prevent the upper house, in which the DPJ has a majority, from blocking the new government.

In addition, there is some speculation that the BOJ may stand pat at this week's meeting to enhance its negotiating position with LDP-led government. Before the weekend, the consensus was for the BOJ to expand its asset purchase plan by JPY5-10 trillion in the face of data pointing to the second consecutive quarterly economic contraction.

The net effect has been a modest bout of profit-taking. The Nikkei finished on its lows. The dollar pared its gains, falling chart support near JPY83.60 and the euro dipping below JPY11.0, filling the opening gaps. Market sentiment is such that new selling of the yen is likely once the profit-taking phase is over.

In addition to the BOJ this week, the Swedish and Norwegian central banks meet. Sweden's Riksbank is expected to deliver a 25 bp rate cut and issue a dovish statement that will encourage expectations of an additional rate cut in the first part of next year. Norway is a different story. There the central bank is expected to stand pat. This expectation had helped spark a 1.6% rise of the Nokkie against Stockie in the second half of last week, lifting the cross to 6-monoth highs near SEK1.19. The euro moved above SEK8.80 briefly today before reversing lower to almost SEK8.7430 before finding support. The euro is finding support near NOK7.37.

The U.S. fiscal cliff remains a Sword of Damocles over the markets. There seems to be some movement but little progress. If the Republican leadership is more accepting of a higher tax rate for the upper incomes, the debate shifts to that definition. Is it $250k or $1 mln.? More jockeying for position is likely this week, but a resolution is unlikely until the last minute, or even afterwards.

Another unresolved issue is Italian politics. The 2013 budget may work its way through parliament this week with final approval possible at the end of the week. After that is achieved, Prime Minister Monti will resign and be the caretaker, instead of technocrat, until elections. The key issue is whether he enters the fray and runs for premier. Ironically, Monti's roots are in the center-right, yet its is the center-left PD that has offered more support. It was Berlusconi's center-right PDL that withdrew support, precipitating the political crisis.

Lastly, China announced it would move the cap on foreign sovereign wealth funds and central bank holdings of Chinese assets of $1 bln under the QFII program. There does not appear to be a new ceiling, but it can now apply for greater investments. This seems to immediately be applicable to only two entities, Qatar Holdings and the HKMA. There also seemed to be a relaxation of rules that limit the repatriation of principal and profits, though how profits are taxed under QFII are is not clear.

Source: Japan's Election And BOJ In Focus, Monti's Decision Awaited