Cautious RBA Could Work Against Further AUD Progress

• Price action in AUD has been solid across 2022, with AUD the best performing currency in G10 year-to-date. The strength in AUD comes despite the ongoing Ukraine crisis and the spike higher in equity and US Treasury volatility - which is usually correlated with AUD weakness.
• This relationship has reversed in recent weeks, with AUD climbing as global equity and bond markets become more fragile:

Figure 1: AUD's traditional relationship with risk-on/risk-off has reversed

Source: MNI / Bloomberg

• Instead, AUD rates have become more clearly determined by monetary policy expectations, with the row back in pricing for ECB rate hikes this year contrasting with more solid RBA pricing.

Figure 2: EUR/AUD correlates well with end-2022 MonPol expectations

Source: MNI/Bloomberg

• This raises a risk to the AUD rally from a more dovish read for the RBA going forward. Wages take focus in the coming months with RBA's Harper stating in an interview with MNI overnight that pay growth would need to hold at "about 4%" to keep inflation within their target band. Current wage growth is well shy of this metric, hitting 2.3% in Q4.