The end of domestic virus restrictions, building bets on RBA hikes, and strong support from commodities have lifted the Australian dollar to lead the G10 currencies through 2022. As economists at Scotiabank think the Reserve Bank of Australia (RBA) will disappoint markets, the aussie should edge lower.

AUD downside ahead with overextended hike expectations

“Building wage pressures and rising current and expected inflation have led the RBA to tee up 2022 hikes. From expecting a ~0.75% RBA rate by end-2022 three months ago, cash rate futures have quickly added ~125 bps in extra tightening this year.” 

“We think the RBA will greatly disappoint markets, opening up the AUD to material losses, more so if we see a reversal in commodity prices – that, as of now, we think should remain supportive.”