Economic data continues to boom across the world even in the face of Omicron and that spells cash rate hikes.

Even the locked-in ‘Rates won’t move until 2024’ Reserve Bank of Australia (RBA) is now in rate hike mode as inflation employment reach levels acceptable for hiking. This news makes next week’s meeting, the first of 2022 a delightfully interesting affair for FX and traders alike.

To illustrate just how to live next Tuesday’s meeting has become here is the interbank market’s price probability of a rate hike(s) for the Australian cash rate in 2022 and 2023.

As you can see the market is pricing in four possibly five rate hikes by the end of the year depending on how they ‘normalise’ the rate back to quarter notches. The implied probably of a rate hike by May now sits at 80 per cent and it’s over 100 per cent come June 2022.

This as we discussed last week will be the theme of 2022. Rate hikes in the face of constant disruptions, inflation that is running away and employment that looks positive on the surface but hides a larger issue of employment quality which is still down is going to be tricky to say the least.

Just look at the employment data from Australia last week. The December employment change was 65,000 to the good, seeing the unemployment rate falling to its lowest level since 2008 at 4.2 per cent. This is 0.3 per cent below what the RBA believes is full employment. However, the underemployment and more importantly underutilisation rate were still stubbornly high, thus the quality of the employment gained in Australia must still be questioned. But is that enough to hold off the hawks that see rate rises? I doubt it.

These movements in markets and changes to the data saw the AUD rally from $0.721 to $0.7257. This really isn’t that large in the scheme of things and shows just how competitive this year will be in the pairs and crosses and the fact the prospect of 4 hikes hasn’t seen strong inflows is proof of this.

The market therefore, is going to have to work out which central bank will move first, which will move the hardest and which has the least amount of scope to let things run further still.

These questions explain why currencies are mixed. For example, to close out last week the strongest to currencies was the AUD and JPY – risk and defense.

EUR/USD slipped from $1.1345 to $1.1305 but is still well up for 2022.

GBP/USD is volatile as ever, moving through ranges large ranges of $1.3662 to $1.3590 then back again then lower still as.

We are going to have to work for our returns in 2022 as trading gets tough.