During November the Australian dollar weakened notably against the US dollar from 0.7508 to 0.7094. Economists at MUFG Bank expect the AUD/USD pair to see a gradual move higher throughout 2022 as the Australian economy recovers and markets readjust the high level of tightening priced into the US curve.

Downside for the aussie AUD/USD from here is limited

“Even after the Omicron market shift, the US rate market is still priced for more than two rate hikes in 2022 and hence the downside for AUD/USD from here is more limited.”

“The data from Australia is now set to improve as covid restrictions are eased. Still, the RBA justifies its more cautious stance on raising rates by pointing to weak wage growth. Q3 wages increased by just 2.2% with the RBA citing sustained growth at least 3.0% as needed to meet RBA inflation goals.”

“With more than 70bps of tightening over the coming 12 months, the pricing still looks excessive but assuming this is also the case in the US, we believe there is scope for a gradual grind higher in AUD/USD through 2022.”