This week saw a continuation of some the strongest demand for Merino wool ever seen at Australian wool auctions. From the outset of selling, buyer competition was intense and the aggressive bidding caused immediate price gains of 30 to 50ac across the entire offering. This buying intensity flowed through the entire two days of selling, but notably gathered momentum on the final day and a further 50ac was added to wool values. Additionally, more wool types were caught up in the action on the closing day, as the finer edge of the comeback and crossbred sectors (25 to 27 micron) also produced price gains of around half a dollar per kg.

The AWEX (Australian Wool Exchange) EMI (Eastern Market Indicator) smashed through the 1900ac barrier and closed the week out at the highest ever point of 1943ac/clean kg. For consecutive weeks now the indicator has risen over 50ac and the gain of 52ac/clean kg this week has seen average wool values jump by up to 6%. We are now almost 28% dearer than at the same period of the season 12 months ago. A very handy increase for wool producers.

The EMI gain when expressed in USD (US Dollars) was even more impressive as the market bucked the week-on-week strengthening of AUD v USD rate. The USD EMI improved 3.88% to 1465usc/clean kg or 55usc higher. Whilst a very good level for wool growers and indication of demand for the fibre, the USD price is still around 50usc lower than the peaks of mid 2011 which had the USD EMI over 1500. Significant though to note was that in 2011 the AUD v USD was well over parity at 1.10 compared to the 0.75 of today.

Chinese buying activity once more dominated purchasing at auction. Even with the large price gains, it was very noticeable how values gained consistently across all three selling centres. This indicates there were firm price levels in the market that buyers were prepared to pay immediately. Prices just didn’t edge up. They opened stronger both days by 30c/kg and then pushed to the higher levels. Such precise and measured actions are usually evidence of the overseas manufacturers setting the levels and auction buyers acting to that rather than forward sellers or speculators here locally in Australia forcing levels.

As prices continue to move into “highest ever” levels, the Australian wool market of today has all the symptoms of a well-adjusted demand v supply scenario. Steady and strong growth in demand for wool in retail outlets across the world in the past 6 to 8 years has not been met with any increase in global wool production. Manufacturers of both woven and knitted product are keener than ever to ensure their access to supply is kept in tact, and this is being shown with growing interest in unique supply chain models, some of which have already been rolled out over the recent months and years. It is ultimately a combination of price resistance by consumers, retailers and manufacturers that will change this current market.

Merino fleece 19mic and finer gained 50ac whilst the broader types were more sought after and gained 85ac. Skirtings were similarly affected whilst the carding market behaved relatively more calmly, but still gained a general 20ac but far more in certain types within that reported gain. Crossbred 27 to 30 micron gained 5 to 10ac.

Next week volumes drop to under 32,000 bales. While some supply guarantee has been met this week, similar sentiment at auctions next week are expected.

Wool forwards report - Southern Aurora Markets

Another very solid week at the spot auction with 19.0 breaching 2200 and 21.0 2100. This saw the forward markets react in sync. 19.0 micron traded to 2030 in September out to December at 1950. August 21.0 peaked at 1955. With new record levels being set each week buyers are increasingly wary of building stocks into the spring. With no confirmation from off shore that the momentum can be sustained the risk from the buy side is high leading to the significant discounts to spot. More importantly the outright price trading is now 10 to 20% above last spring auction levels. 2017 Auction Levels (peak forward trades in brackets)

Conversely growers are hesitant to commit to discounts of 8 to 10% below cash to hedge forward on a market than has risen for two years. Activity this week indicates that growers, particularly those that have little or no hedges in place, are putting more weight on the outright level and the guaranteed return then the discount to spot. Pleasingly options traded again this week with the focus on lower strike prices to keep the premiums as low as possible in this volatile environment.

AUD Commentary - Southern Aurora Markets

It's been a roller-coaster week for the Australian Dollar, as it started Monday at .7562 before tumbling mid-week on several poor data releases to hit .7448 before edging higher Friday to .7510.

It's essentially a tale of two currencies and two economies, as the USD lifts on a booming economy, strong employment, rising wages, a buoyant stock market and the certainty that the U.S. Federal Reserve will raise rates several times this year.

In comparison, Australian data unemployment up to 5.6% despite 22,600 new jobs being created. Population growth but mainly more Australians being forced to delay retirement because of high levels of debt were cited as reasons. Retail sales recorded zero growth, however, the weakest data release was wages, as the Australian Bureau of Statistics (ABS) release showed hourly wage growth rising by 0.47% in the March quarter, below the 0.6% predicted, leaving annual wage growth lower at 2.07%.

Technically the Aussie Dollar has had a lot of bad news thrown at it this week, and still it’s holding quite well, as the bearish momentum seems to be dissipating a little, with a partial rebound to .7580 now more likely, and possibly a break above that to .7660. Still the Aussie dollar remains contained within a large sideways trading pattern, albeit that it is tracking lower, but at this stage its unable to break key support at .7412.