This week at wool auctions was relatively uneventful. A stable commencement was followed by a mid week rise and then a final day of consolidation. Prices remain in very high percentile bands across the entire Merino sector. Buyer purchasing intensity remains high, and reports of new business being written is a daily occurrence. The Eastern Market Indicator (EMI) continues to reach new high levels and topped out the week at 1449ac clean/kg, a 9ac or 0.63% gain. In USD, the EMI added 3usc to 1114usc clean per kg.

The Merino fleece market appeared to change track slightly this week as buyers attention moved more to the broader 18.5 to 21 micron area. With superfine wools finer than 18.5 micron now 200ac and more dearer than their broader counterparts, interest from the predominantly Chinese traders turned to what looked like a more advantageously priced type. As a result, all types and descriptions 18 to 21 micron were a general 15 to 35ac clean kg dearer for the week. The finer wools were not neglected by any means and a 5 to 15ac clean/kg gain was extracted from buyers pockets for these wools.

Merino skirtings behaved to a mirror image of last weeks lack lustre sale series. Buyers are still chasing all skirting types, but for the past couple of sales, it is clear that they are currently just not prepared to pay any more for them. A generally unchanged result occurred, with again just the better types finer than 18 micron showing lower (less than 4%) vm (vegetable matter) remaining on the improve and adding 10 to 15ac clean/kg. The price of these brokens/pieces and bellies are considered “too close” to the fleece price in a lot of cases. Given the lesser top yield produced, processors/buyers are now looking for some price relief to augment making tops at saleable levels on the spot and forward markets.

Cardings on the other hand were strongly sought from the outset and gains of up to 25ac clean/kg were achieved. Those wools destined for washing type orders (scouring only and very limited vm - less than 0.3%vm) were being bought “at best” in some instances and extreme price rises occurred, out of kilter with the rest of the consistent, but dearer, carding market. Merino carding indicators are remaining steadfast in record all time high price levels and are now sitting just short of 1200ac clean/kg. Not bad money for a combination of growers lambs, locks, crutchings and stains.

The crossbred segment continues to recover well, and in particular the fine/medium area of 25 to 29 micron. Gains of 15 to 30ac clean/kg were well appreciated by grower sellers and was evidenced by the substantial reduction in the pass-in rates. Quite noticeable this week was that as the market strengthened further, the discounts of ill prepared clips lessened. The past week's heavy discounting hammers home the clear signal that to extract every cent possible, clips must be prepared to a minimum standard of quality, otherwise when selling into a weak market, the penalties can be high.

As an interesting and related side note, data released mid week showed house prices continued to rise across China in the first month of this year. China’s all new home price indicator was on average 12.2% dearer than a year ago in January 2016. Getting down to a geographic level within the country, the Shanghai housing indicator rose a healthy 23.8% year-on-year increase in January, but couldn’t match the Beijing growth of 24.7%. These large gains are one reflection of the strength of the Chinese economy which in turn is shown in how Chinese interests influence the prices paid at auction for Australian wool. The AUD is considered by some economists as the liquid China economic proxy, but others argue the link between the AUD path and the key China economic data is not obvious. For example the AUD rose following Wednesday’s release of the Chinese house price data, giving credence to the former view. Whatever the case, what is significant from the data is that if growth rates and confidence of real estate in China is anything to go by, a belief of a sustainable wool price going forward is not beyond being a reasonable assumption.

Quantities of wool at auction are starting to show signs of waning which is usual for this time of year. A touch over 42,000 bales goes to auction next week. A good selection of quality super fine (finer than 18.5 micron) is expected in Sydney in a designated superfine sale. Prices are expected to remain buoyant as this past week’s purchasing was dominated by local traders and it is widely expected that the large Chinese indent operators can ill afford to “sit out” for too long, particularly in the quality Merino sector.

AUD Commentary - SAW

The Aussie Dollar rallied at weeks end, helped higher by USD weak-ness, to be trading Friday at .7718, after hitting a weekly and over-night high of .7740. The rally was all the more impressive, as on Thursday’s the ABS released data showing Private Capital Expenditure had tumbled in the 4th quarter by 2.1 percent against an expectation of a fall of 0.5 percent. The AUD immediately fell after that release to .7668. The move higher in the Aussie came as the USD fell against a basket of major currencies on a perceived lack of progress on U.S. tax reform and public spending and now less urgency to raise interest rates. Despite rising house prices in Australia, there is a growing number of analysts now suggesting the RBA might actually be forced to cut rates late this year as wage growth is stuck at record lows, and inflation remains under the RBA’s target band. A strong and sustained rally in Aussie Dollar may also prompt the RBA to move on rates. Technically the Aussie is testing the topside of its long-term down trend channel, and a break up through this could trigger a substantial rally. For the moment the Aussie is contained by overhead resistance at 0.7794 and downside support at .7605.

Southern Aurora Wool forwards report

This week’s forward market again reflected the value of having hedging levels in the market. The physical auction showed solid support early in the week but trailed off towards Thursdays close. Forwards peaked mid week with 19.0 trading for April at 1755 and 21.0 micron at cash (1430 to 1435) for April. These levels were up again on last week but retracted with momentum stalling in the spot market. Buyers remained cautious at these high levels and looked for value particularly into the spring and new year.

The forward curve still reflects the concern of the trade about the ability of the market to hold medium to longer term at these historically high levels. We see this pattern continuing in the short term with supply and demand in balance. Some retraction from the current levels is anticipated by the trade but the opinions vary on the timing, length and depth of the correction. We are seeing more growers placing Good Till Cancelled (GTC) orders, albeit at higher levels, as they look to lock in substantial margins. Most activity centres around the April to June quarter. Offering into the spring is solid ranging from 1380 to 1420 on the key 21.0 micron index. We will need a further rally before exporters value at these levels relative to the risk.