Yet again, wool price records continued to tumble this week at Australian wool auctions, albeit almost entirely forced by a significant weakening of the Australian Dollar (AUD) versus the United States Dollar (USD). Purchasing demand patterns identical to last week remained in play this week, with most pressure still centred around Merino wools of 19 to 22 micron. Strong price advances were also recorded on all other types and descriptions. The AWEX (Australian Wool Exchange) EMI (Eastern Market Indicator) lifted 52ac to set a new daily and week ending record high of 2073ac/clean kg. This figure represents a staggering year on year increase of 540ac (35%).

Despite incredible gains being posted on local prices here, almost all trading exporters were reporting subdued interest and demand from China. There has been some evidence of growing purchasing enquiry from India, which certainly assisted. This week though, it was all about a single exchange rate, the USD strength against the AUD. The AUD usually follows a direct pattern against all of our major trading currencies in a pegged manner, but this past week has seen the USD break away to it’s own independent position of strength against other currencies. Whilst depreciating by over 2.5% against the USD, the AUD was only 1% lower against the Chinese Yuan and just 0.5% lower against the Euro.

Indent operators are currently more influential than normal amongst the Chinese buyers. This is seen by the cancelling out of US exchange rate advantages by the identical rises in the higher local auction prices. This price movement is almost exclusively indicative of these prompt or indent buying orders determining levels in the market. The EMI when expressed in USD shifted just 1usc lower to 1526usc/clean kg, and is probably indicative of the market trying to consolidate around that 1500 usc plus mark after trading in a very narrow band of just 14usc/clean kg for the past month.

Merino fleece gained 60 to 80ac in general for the week, whilst skirtings and cardings types were less excitable and gained a comparatively modest 25ac. Crossbreds and comebacks of 25 to 28 micron were highly sought and added 40ac to their value.

What was again noticeable this week was the current strength of one of the largest top makers in China. Not only is this top maker buying quantity of wool, they are also picking up a high percentage of the quality wool on offer, particularly at the super fine end of the Merino selection. Other Chinese indent operators are also thought to be buying a large portion of their purchased volumes for top makers or commission top makers. With first stage processors lapping up a sizeable chunk of current offerings this augurs well for the immediate to short term prospects of the market.

Interesting reports have emerged regarding the receival of freshly shorn wool into brokers stores dropping off substantially in comparison to June last year. Rostered quantities for the final three weeks selling before the annual three week recess in July/August seem to validate this rhetoric as figures show that just over 106,000 bales are scheduled to be available in comparison to the 134,000 bales or 26% more offered last year. Obviously, the largest factor is the continuing dry across most of Australia’s wool growing regions causing growers to off load sheep as cereal hay, cotton seed and feed grain prices head to (and over in some areas) $400/tonne.

Next week has 60% more quantity on offer than this past week at 32,000 bales. Current sentiment should see a steady market, and a price direction that is largely currency-dependent.

Wool forwards report - Southern Aurora Markets

Another strong week for the spot market saw the forward markets trade at strong levels. Trading was sporadic as both buyers and sellers grappled with assessment of fair value. Exporters are facing a chorus of discontent from processors unable sell tops and yarns within dollars of replacement. Any forward sales uncovered have proved costly for the exporter but the alternative of taking stock brings incumbent risk and financing pressures. Against this backdrop is the current unrelenting grind upwards of a market faced with tight spot supply and the pressure to keep machinery running.

The dilemma facing growers today is trying to balance the market signals. While the market has risen constantly for almost two years the forwards have remained in discount. With the benefit of hindsight forward hedging has not delivered positive outcomes. The question now for sellers is not whether those signals are still inaccurate but whether the risk and the value of certain price outcomes for part of their production is too high to ignore. The trade levels achieved this week probably go some of the way to answering that question. 21.0 trading 2100 plus in the early spring, 2000 cents in December and 1970 in February 2019 delivers strong guaranteed margins.

We expect the tight supply conditions to hold the market through to the end of the season but these price levels cash flow constraints and increased demand destruction could deliver high volatility.

AUD Commentary - Southern Aurora Markets

The AUD had another tough week, falling to a fresh yearly low yesterday of .7346 after starting Monday at .7425. Today, Friday the Aussie is trading quietly .7370. Data released during the week underscored the mixed performance of the economy. The U.S. Dollar rallied overnight to a fresh 12 month high, as fears over an US-China trade war faded. Helping ease concerns the People’s Bank of China said that it will reduce its reserve requirements to ease bur-dens on financial institutions doing trade. The AUD was also pressured as data from China confirmed a slowdown in that economy. Also making life tough for the AUD was the speech by RBA Governor Philip Lowe who said, "rather than low inflation, it is very high debt levels, and asset prices, are the number one domestic risk” facing the economy. He said he sees no change to policy anytime soon, saying the best course of action is to be patient, saying we don’t need to force the process”.

Technically the AUD is attempting consolidation around this level, after falling steeply through key support. This suggests a small re-bound ahead, however that is likely to be short lived, as the bias remains down targeting the next support .7382 which is a 61.8% Fibonacci level, then to the next support at .7225. Any upside likely to be limited 7680. All this action still remains contained within a large sideways congestion pattern.