After a brief respite in the market from rapid price gains last week, this week’s action at Australian wool auctions saw prices generally head back to the positive trajectory. Identical demand patterns were evident as Merino types broader than 19 micron were highly sought, and the finer than 19 micron types just being picked through for value, extending the drift downward in that area of the selection. All other segments sold generally unchanged, with just some minor adjustments, both up and down, being recorded. The AWEX (Australian Wool Exchange) EMI (Eastern Market Indicator) lifted 10ac almost exclusively on the back of the price gains of the fine/medium Merino fleece sector, and closed at 2021ac/clean kg.

Despite the AUD-EMI level increasing this week, the tone at auction was more subdued and cautious the figures indicate. Some price relief was afforded to overseas buyers on a week-to-week forex (foreign exchange) comparison. All three exchange rates relative to the AUD went 1.3% or more in their favour. The EMI when expressed in USD (US Dollars) bore this sentiment out as that indicator took the opposite route to the AUD EMI and closed 13usc lower at 1527usc/clean kg.

Within the Merino fleece sector the most significant current factor affecting the market is the unusual price gaps between differing microns. In normal circumstances, wool is generally priced with the premium/discount “per point of a micron” as the cornerstone. The last few weeks has seen that equation narrow considerably, culminating this week with the inverse occurring with “premiums” being paid for wools of broader micron. This was particularly applicable to wools around 21 micron, which received better prices than wools a micron a two finer of similar quality of other tests and appraisal.

As this price setting situation escalated, the Merino fleece sector between 18.5 and 22.5 micron had a theoretical range of values of less than 70ac/ clean kg between highest and lowest, with quite often the best quality 21 micron sale lots being at the higher end of those levels. In reality, wools between 19 and 22 micron were all receiving the same returns through individual clips and between entire clips of different microns. The continuing drought across most of Australia’s wool growing regions is causing a shortage of these broader wools, as the dry conditions play havoc on normal fibre diameter production.

Demand from top makers was becoming more noticeable this week, and in particular from one of the larger manufacturers ex China. Their involvement increased exponentially as the week progressed and they became keener as prices at the super fine (18.5 and finer) end drifted ever more closer to their broader counterparts. Other orders for top making were evident as well through the smaller indent operators, and these orders also appeared to concentrate on areas away from the pressure point of 19.5 and 21 micron types. The larger indent operator though was firmly focussed on both of those types and with the smaller offering and selection, it was somewhat inevitable the price went up as forward sellers and other origins had to meet their obligations and fight for quantity.

The Merino skirting market tracked similarly to the fleece, whilst the comeback, crossbreds and carding sectors remained around established values, albeit to the positive side of prices.

Next week sees Australia go back to just the two Eastern selling centres in operation. As such, an extremely small offering of a little over 21,000 bales is rostered to sell nationally , so no radical change to current market conditions is expected.

Wool forwards report - Southern Aurora Markets

The Forward market reflected the strength of the medium sector with two thirds of the weeks trades focused on 21.0 and 22.0 microns. The balance of the trades in the 18.0 to 19.0 micron delivered strong outright prices as exporters looked for value against spot. Exporters remain wary and bids for spring and beyond reflected the inferred risk of better supply and price fatigue that processors are experiencing. Trades on 21.0 microns into the new year delivered hedge levels of 1930 which were higher than the then record receive at auction. March 2018 auction average for the 21 MPG was 1892 and April 1925.

Tight supply is expected to dominate market direction for the remainder of the current season and should deliver strong outright levels on forwards. The risk level of a correction is growing in the minds of both processors and exporters. Inventory costs have risen 68 percent in 18 months. The timing and extent of the correction is difficult to predict making strategic hedge decisions a challenge for both buyer and seller. This is reflected in the pricing of options with few sellers wanting to take on the risk.

Hedging at the current forward levels would appear to be an easy decision. 2000 plus for 21.0 into the spring and 1930 into next autumn is delivering a guaranteed return of between $2400 and $2500 per bale.

With the aid of hindsight hedging forward over the last 18 months has delivered negative results. In essence this is no different than being disappointed in taking car insurance and not having an accident. Both buyer and seller need to find a fair value forward level to deliver a degree of certainty. The value of certainty is more important than the fear of lost opportunity.

AUD Commentary - Southern Aurora Markets

The Australian Dollar ended up having a tough week, and today, Friday, has tumbled to a low of .7465, in contrast to the start of the week where the AUD was trading quietly around the .7600 level.

This was prior to Wednesday’s U.S Federal Reserve Board announcement of an increase in its official Cash Rate of 0.25%. Even though this was widely expected, the AUD immediately dropped 80 points. A weak recovery was attempted, however that rebound was short lived as the AUD then fell sharply to the week’s low.

Weak economic data out of China combined with the European Central Bank (ECB) saying that the Bloc’s growth rate was lower than expected. The ECB update also said it was likely there would be no rate change till at least the end of 2019. That is in stark contrast to data coming out of the U.S showing that economic expansion is gathering pace and backed up by surging U.S Retail Sales data, stronger employment data and a new record high on the NASDAQ. Against that backdrop the USD surged higher against all currencies.

Technically the Australian Dollar has broken key support this week, and the Chart bias is now negative. The AUD is likely to test the next strong .7450 support level. A break of that would see the AUD likely to fall to the years low of .7412.