Yuan And Ruble Fall 0.75%, Dollar And Yen Firmer

The foreign exchange market is quiet. The euro remains within yesterday's ranges. The dollar initially extended yesterday's gains against the yen, but was turned back when it approached JPY102. The recent lows, going back to early February (~JPY101.20) may be challenged in the North American session. Sterling is trading slightly heavier as it straddles the $1.6600 area, around which it has gravitated for the past five sessions.

The Chinese yuan extended its recent losses, with the dollar climbing to CNY6.1950. It has weakened by 0.73% in the first two days of the week, since the new 2% band was announced. The offshore yuan (CNH) has slipped 0.42%. The PBOC drained liquidity by selling 28-day repos today. It drained CNY100 bln after draining an additional CNY110 bln in the first two weeks of the month. The 7-day repo rate rose 23 bp to 2.89%.

There is some heightened anxiety, spurred by a troubled real estate development company in China. Zhejian Xingrun Real Estate Company has CNY3.5 bln in debt, according to reports. Premier Xi warned recently of more failures as part of the financial reform efforts. Separately, but perhaps related, China reported a slower pace for new home price increases (top 70 cities) to 8.7% year-over-year from 9.6% in January.

The Russian ruble fell as much the yuan. MICEX has built on yesterday's gains and is up about 0.5% in the late afternoon in Moscow. The general verdict is that the US and European sanctions are mild. On the one hand, that means that Putin's speech before the Russian parliament today (11 GMT/ 7:00 ET ) may not be inflammatory with recriminations. On the other hand, many are still concerned that, without a more forceful showing, Putin will press ahead into east Ukraine.

Today, negotiations with Iran resume over its nuclear enrichment program. Ironically, Russian cooperation is still desired here. The US and Europe also seek Russian cooperation in Syria. Crimea may have been sacrificed—as we have argued—due to European officials' miscalculation, it may also have been sacrificed for arguably more strategic goals.

Turning to Japan, in a little noticed development, land prices in the country's largest cities rose for the first time in six years. The value of land in the top three cities rose 0.7% from January 2013. Residential land prices rose 0.5% after falling 0.8% in 2012. Commercial land values rose 1.6% after falling 0.5% in 2012. Although we have been critical of Abenomics, we do recognize that a recovery in Japanese land prices could be an important positive development, for inflation expectations and the wealth effect. It may also be positive for Japanese financial institutions.

In Europe, the news stream has been light. Of note, the German Constitutional Court upheld the ESM, the European Stabilization Mechanism. It does require a change in domestic laws to ensure timely payments to it. This has no bearing whatsoever on the OMT program which the high court referred to the European Court of Justice.

The euro came under pressure, pushing back toward yesterday's lows in response to the weaker than expected ZEW survey. The measure of the current situation improved, to 51.3 from 50.0, but the expectations component unexpectedly fell sharply to 46.6 from 55.7. Even if the euro slips through the $1.3880 area seen yesterday, support last week was built in the $1.3830-40 area.

The US reports February CPI and housing starts, as the FOMC's two-day meeting gets under way. The CPI is expected to remain tame, with the headline rate falling to 1.2% from 1.6%, while the core rate is expected to remain steady at 1.6%. Housing starts should rebound from the outsized 16% decline in January. Permits are also expected to have recovered.