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Euro Weakens as CPI Fuels ECB Easing Speculation; Rand Advances

The euro fell against most of its 16 major peers on speculation a deteriorating outlook for consumer prices may prompt the European Central Bank to add monetary stimulus next week.

The 18-nation currency dropped as consumer inflation remained below 1 percent at an annual rate last month and ECB Executive Board member Peter Praet said the central bank has tools to use if its mandate to maintain price stability. South Africa’s rand led gains among major currencies on optimism the economy strengthened last quarter. China’s yuan extended a decline from its biggest weekly drop in more than two years after the central bank lowered the official reference rate.

“Euro is still too strong at these levels, we’re looking to be short euro-dollar,” said Mike Moran, a senior currency strategist at Standard Chartered Plc in New York. “It’s certainly possible we could see a dovish undertone from the ECB officials that’ll leave euro bulls vulnerable.”

The euro dropped as much as 0.4 percent before trading at 140.79 yen at 5 p.m. New York time, after advancing to 141.27 on Feb. 21, the strongest since Jan. 24. The single currency declined 0.1 percent to $1.3735. The dollar was little changed at 102.51 yen.

Price Swings

JPMorgan Chase & Co.’s volatility index for the currencies of Group of Seven nations fell to 7.57 percentage points, the lowest since Oct. 24. The gauge reached 8.74 percentage points on Feb. 3.

The rand rallied for a third day before data released tomorrow that’ll show growth in Africa’s biggest economy gained momentum.

Gross domestic product probably expanded 3.4 percent in the three months through December from 0.7 percent in the previous quarter, according to the median estimate of 21 economists in a Bloomberg survey. That would give the central bank room to raise interest rates to combat inflation, while easing pressure on Finance Minister Pravin Gordhan as he prepares to present his annual budget to lawmakers on Feb. 26.

“Stronger economic growth should be viewed as rand positive, largely via its action on the Reserve Bank’s willingness to tighten monetary policy,” Bruce Donald, a strategist at Standard Bank Group Ltd. in Johannesburg, said in a note. Gordhan’s “fiscal stance is probably most relevant for the rand via any consequences it has for perceptions of creditworthiness and thus debt ratings,” he said.

South Africa’s currency gained 1.2 percent to 10.7959 per dollar.

Franc Strength

The Swiss franc rose to the highest in two months before closing 0.2 percent lower to 88.90 centimes against the dollar.

Swiss franc buying is “at extremes,” with the strongest four-week flow recorded by Citigroup Inc. clients, Richard Cochinos, the head of Americas G-10 currency strategy at Citigroup in New York, wrote in a report. Purchases of the euro and the yen haven’t kept up with franc buying, suggesting traders are buying the currency as a proxy for Europe’s common currency in the recent risk-asset rally.

Norway’s krone rose after primary insiders of pharmaceutical company Algeta ASA accepted a buyout offer from German drug maker Bayer AG. The currency rallied 0.7 percent to 6.0359 against the dollar.

The yuan may weaken in the short term and even fall below the People’s Bank of China’s daily fixing, China International Capital Corp. analysts led by Wensheng Peng wrote in a note today. Industrial Bank Co. and other unidentified lenders have reduced loans to the property sector and related industries such as steel and cement, Shanghai Securities News reported, without saying where it got the information.

The yuan depreciated 0.1 percent to 6.0984 per dollar after sliding 0.4 percent last week, the most since January 2012.

Annual Rankings

The euro has gained 6.8 percent in the past 12 months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar rose 1 percent, while the yen slid 10.6 percent.

The ECB’s Governing Council will have “the full set of information needed for deciding whether to act or not” by its March 6 meeting when it will publish its inflation projection for 2016, ECB President Mario Draghi told reporters yesterday after Group-of-20 policy makers met in Sydney. Praet, the central bank’s chief economist, said in an interview with Portugal’s Expresso published on Feb. 22 that “weakness in price development is extending to the medium term.”

“The timing of the statement clearly suggests they’re discussing policy options,” said Athanasios Vamvakidis, a currency strategist at Bank of America Corp. in London, referring to the ECB. “If we see inflation falling further, further easing is very likely.”

Consumer prices rose an annual 0.8 percent in January, the European Union’s statistics office said today. While that exceeds the initial Jan. 31 estimate of 0.7 percent, it remains below the ECB’s 2 percent target. Gains in prices dropped to 0.7 percent this month, according to the median estimate of economists in a Bloomberg survey.

“The market will be thinking increasingly about the ECB next week,” said Gavin Friend, a foreign-exchange strategist at National Australia Bank Ltd. in London. Comments from policy makers “seem to suggest that something could happen. I wonder whether, under that basis, the euro is going to struggle to hold gains,” he said.

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