My Thoughts on Cyprus, Russia & Japan

UNLIKE LAST YEAR WHEN RUSSIA BAILED OUT CYPRUS via a 2.5 bn loan at a below-market rate of 4.5%, Russia has not budged today. Moscow has come under vocal criticism by the West for its continuous veto of a resolution to intervene in Syria aimed at stemming the violence by Assad. Another Russian bail-out Cyprus may yet again be needed by global markets, but neither Washington nor Berlin are likely to initiate those demands any time soon.

TIME FOR ANOTHER JAPANESE POLITICAL SHAKE-UP?

Yen awaits Tuesdays Japanese Lower House vote on a consumption tax bill (double the 5% rate), which will likely pass by a majority, as the ruling DPJ (289/480 seats) is said to have agreed with the opposition LDP (120 seats) as well as the smaller opposition New Komeito Party.

But there is talk that even if the bill passes, the anti-bill faction led by Ozawa inside the ruling DPJ may break away from the party and force PM Noda to resign.

The fundamental impact of raising consumption tax may be positive for the yen as it addresses the nations ballooning budget deficit, which is among the recommendations of the major credit rating agencies. Currently, the yen is outperforming as a result of the renewed deterioration in global equities.

Nonetheless, we have seen in the past how eroding political confidence in Japan can weigh on the yen. In the event that a no-confidence vote emerges and/or a dissolution of the Lower House dissolution breaks out, then we could see fresh downside for the yen.

The other scenario would be for the tax hike bill to be passed and lead to yen selling as the fiscally austere move may necessitate fresh easing (asset purchases) by the Bank of Japan.

We expect USDJPY to remain supported above 79.00, before regaining a push higher on a combination of renewed political reverberations in Japan and a fresh run-up in US (and global) bond yields as traders doubt the efficacy of the planned Operation Twist in the face of increasing fiscal questions in the US and talk of a bubble in German bunds.

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