All the action this week at Australian wool auctions centred around the rising Merino fleece values locally. Business conditions remain relatively subdued as China was on holiday and most of this series gains can be attributed to the more advantageous forex (foreign exchange) rates. Given the extent of the positive gains that the Merino fleece sector extracted, it surprised some to see that a move of just 8ac/clean kg was recorded on the AWEX EMI (Australian Wool Exchange- Eastern Market Indicator). The indicator finished the week at 1820ac/clean kg which equalled the highest ever daily EMI level but set a new record as far as the EMI weekly closing figure goes.

The forex (foreign exchange) rates acted in a completely reverse manner to last week. The currency last week helped advance prices in USD by 17usc and shook the EMI 6ac lower in AUD terms, but this week saw the overseas demand weaken slightly and prices in US dropped almost identically by 16usc and gained 8ac in AUD. The USD EMI closed the week at 1421usc/clean kg.

The activity and price pressures in wool trading and manufacturing for years now has purely and simply been ruled by the growing demand for our fibre. As the wool price escalates to higher levels, particularly Merino, exporter-buyers bank accounts have seen significant ebbs and flows over recent months given the significant finance that is involved with wool buying these days. A full container load of Merino fleece carries about 108 bales and this now represents well over A$300,000 of raw wool value, therefore it is common that managing financing stress has become a regular component of buyer management.

To some extent forex rates are also a factor, but the ever-changing rates are more of an adjustment factor for day to day pricing operations and not the mechanism for setting medium to longer term prices. The rates become more important when clear demand for prompt business is not apparent or when exporters are reticent to book firm contracts and indents are then having to be placed into the market and these are based on USD amounts.

The entire Merino fleece sector enjoyed good gains this week. The super fine ( 16.6 to 18.5 mic) and fine wools up to 19.5 micron all gained 25 to 30ac with particularly strong competition on the 19.5 micron type area. The major gains though were extracted for wools 20 to 22 micron with most of those wools obtaining rises of up to 50ac/clean kg. Interesting to note though was the slight pull back on the final day at Fremantle on all Merino fleece, which earlier in the week had enjoyed the highest prices paid of all centres for 19mic and broader. Merino skirtings of all qualities saw a drop in competition and drifted throughout to close 20ac lower. Cardings suffered the same fate with a 25ac loss, but all comeback and crossbred (25 to 32 micron) wools were well sought and managed gains of 5 to 25ac with the major advances being seen at the finer end of that range of types.

The attractive wool prices have seen rostered auction quantities grow throughout February from original schedules and next week is no exception with 44,500 bales now for sale. This is up from 39,100 bales or 14% higher than what was advertised just last week. Similar trends are expected to remain in-play and dollar-related movements are the most common held expectations.

Australian Dollar Commentary - SA Markets

The Australian Dollar took a hit during the week, falling from Monday’s high of .7934 to a low Thursday of .7795, before recovering a little on Friday to .7845.

Westpac Economists say modelling shows the AUD is looking expensive, and any rally will struggle. Rob Rennie head of Strategy said “The potent combination of a deterioration in yield spreads, limited support from commodity prices, increased political risks, and a clear message from RBA Governor Philip Lowe Thursday that ‘progress in reducing unemployment and inflation is a key target, and present rate settings are appropriate” weighed on the Aussie. NAB’s Economists David De Garis added that global FX markets are captive to the USD, and the Aussie has only risen due to the tumbling USD. On Thursday, Fed Governor James Bullard, said he doubted the US economy needed the predicted four rate hikes this year, and his comments were support by Dallas Federal President Robert Kaplan who said “three rate increases in 2018 is reasonable”, these comments sparked a fresh fall in the USD, helping the AUD higher on Friday.

Technically the AUD/USD remains contained within its broad multi-year trading range. On the upside, a break above .7980 resistance should trigger a rally to retest .8135. On the downside, first support remains at .7758 and break through that will target 0.7500 key support.

Wool forwards report - SA Markets

Modest gains were achieved in the forwards this week. Trades were restricted to the current season. Buyers were cautious to commit to large quantities while historically high prices and the Chinese holidays left the demand signals still muted. 19.0 traded to May at 2100 and 21.0 to 1830 for the same period. Only 1.25% of the underlying clip being hedged at these near record prices the market is indicating a mismatch in expectations. Exporters and processors are anticipating some relief in prices as latter stage demand is impacted at current price levels. Growers, understandably, are reluctant to commit for-ward at discounts given the current price cycle has been running for 14 months. While a wait and hold policy has, with the benefit of hindsight, been the best strategy it is also important to remember where this cycle started. 14 months ago 19.0 micron was under 1600 and 21.0 under 1400.

Managing this risk right along the pipeline is becoming paramount. Hopefully the demand signals will become clearer over the coming weeks and both buyer and seller will be able find fair value across the curve alleviating some risk in this volatile environment.