An extraordinarily strong selling wee at Australian wool auction markets. The Merino sector has a hit a sweet spot with our overseas customers with many buyers appearing to be bidding without a ceiling price at times this week. Prices rose constantly during selling in an auction wee that saw all Merino types on offer 60 to 80ac clean/ g dearer by the close. Cardings came under pressure too and progressed 40ac clean/kg dearer and also pleasing to note was the 15ac clean/kg uplift in the broader crossbred types. The only casualty for the wee was a very limited volume of crossbred wool 25.5 to 26.5 micron which dropped 20ac clean/kg on established price levels . The Eastern Market Indicator (EMI) advanced by 49ac clean/ g to conclude the week almost 4% higher at a seasonal high of 1363ac clean/kg.

Assisting but not explaining all the shift this week was the AUD to USD forex rate. For the second week running the forex went significantly in favour of local sellers over the past seven days, falling over 100 points or 1.4% from 74.78 to 73.75. At one stage the currency hit 73.21, but that was before selling commenced and it is left to the imagination whether any buyers took advantage of those sort of levels. Those manufacturers buying in Euro were not so well looked after and an appreciation of nearly 4% in that currency transpired.

Some commentary referred to this weeks buying as “panic purchasing”, but in reality the drop in the USD versus AUD from week to week saw a lesser weekly 22usc clean/kg impact on the overall market. The EMI when expressed in US finished at 1005usc clean/kg. That sort of price rise should be able to be absorbed by end users without too much pain if buying on the day’s ruling foreign exchange rate. The pain would be felt heavily though by those wool traders locked into forward orders of Merino wools covered on the old exchange rate and based upon the ac/kg price at the time of booking in the past. Ouch!

Adding weight to the year on year improvement in demand for Merino wool are the much larger auction volumes. AWEX point to 5.6% more first hand wool that has been offered so far this season when compared to last year. This may prove to be purely a result of the additional extra sale we had last year which saw a sale in the impossible “Week 53” of the year. Last year also saw a wee 25 sale being held pre Christmas with around 42,000 bales being offered. The soon to be released November AWTA Key test Data should give more in-sight as to the year on year volume comparisons.

This week s extensive rise seems to reinforce the commonly held belief amongst most participants that stocks of Merino wool are dangerously low. The price reaction this week across the entire Merino market segment was out of the normal and considered an outlier in statistical terms, but the intense interest from China was exceptional. One thing for certain though is that the Merino wool growers in particular will gladly take the extra dollars on offer and maybe feel like Christmas has come early and Santa is Chinese !

Next week ’s sale roster shows around 48,500 bales set to go under the hammer. With Fremantle closing at or above the eastern states price levels, this is usually a good lead that the following week will at least commence stronger again. Continued interest from China and outstanding forward commitments of the exporters should see the bull run continue at least into next week and perhaps remain the trend until the Christmas recess in 3 more sale weeks.

Financial and AUD Commentary - Source SAW

It was another remarkable week, as the USD surged to 13 year highs against a basket of currencies, and the Dow Jones, S&P500 and Nasdaq all closed at record highs. What’s fuelling the USD rally is strong US data, expectations of a Fed rate hike, and widening bond differentials as investors are betting Donald Trump’s policies will drive growth and inflation. Overnight data showed U.S home sales rose to their highest annual rate since February 2007. Today, Friday however markets are quieter as the U.S markets are closed for the Thanksgiving holiday, however that didn’t stop the AUD from recovering this morning to .7408 on the back of rising Oil, Coal and Iron Prices.

The AUD this week had a range of .7321 to .7442. Two Global Banks have very different view on the Australian Dollar's Future: Goldman Sachs’ believes the economy “has moved through an important transition point” that will lead to faster economic growth and a higher AUD ahead. It said that the recent price spike in Australia’s key commodity exports will create a “sharp turn in Australia’s national income dynamic”. As a result, it now sees the AUD trading to 78 cents within the next three months. Opposing that view is the Deutsche Bank in London. They believe 3 reasons why the outlook for the Aussie is bearish. Weak domestic inflation, the livelihood a reversal in the prices for Australia’s key commodity exports and long positioning among currency speculators could trigger a complete change and send the Aussie Dollar tumbling.

Technically speaking the Aussie bias remains to the downside, with a first major target support at 0.7144. On the upside, a rally above 0.7442 minor resistance will turn the Aussie neutral and bring some consolidation, before likely staging a further decline.

Southern Aurora Wool Forwards Report

Another interesting week on the forwards and the auction. The momentum obtained last week in both the auction and forwards carried into this week . The decline in the Australian Dollar stimulated the forwards early in the week . This confidence was franked by the auction through the three selling days with prices rising substantially across all merino types. 19.0 microns hit their highest levels for five years with growers taking the opportunity to hedge their pre Easter clips from 1550 to 1570 and January at 1585. The forwards in 21.0 also traded strongly with December trading to 1430 and growers being able hedge February to April between 1400 to 1410.

Reaction off shore over the next few days will determine whether the current momentum can be maintained. The impact of the rise has been somewhat muted by the weaker AUD. We expect hedging opportunities to remain in place but the rapid rise in prices will most likely lead to the forward curve to steepen. Growers could look to a mixture of options and outrights to manage the margins at these levels.