AUD/EUR should see a return to 0.6450 in the first quarter of 2022. However, in the short-term, there is scope for a probe of 0.6225/40 as markets nervously await hard data on vaccine efficacy vs Omicron, economists at Westpac report.

Substantial move in yield spreads in Aussie’s favour in recent weeks

“The aussie was set back sharply after the November RBA meeting where it insisted that a 2022 rate hike remained very unlikely. Yet, markets are betting on higher rates in Australia but limited change in Europe, producing the highest AUD 2yr yield premiums since 2019.”

“Looking into Q1 2022, we see the euro with more downside against a strong USD, to the 1.10 area, whereas the aussie should be able to break even around 0.71. This would see AUD/EUR back to 0.6450, though shorter-term, there is scope for a probe of 0.6225/40.”