On the surface, it appeared there was not much change at Australian wool auction sales this week, but in reality, price and demand was much weaker than what was initially expected at the commencement of selling. Predominantly it was the weaker value of the Australian dollar (AUD) against the US Dollar (USD) that assisted the local prices maintain values. That Foreign Exchange (forex) rate weakened by 1.23% week on week, but at times during selling, that rate was over 1.5% to the advantage of buyers using USD.

The AWEX (Australian Wool Exchange) EMI (Eastern Market Indicator) ended the week losing just 2ac to 2088ac clean/kg after gaining 11ac on the first day, then losing 13ac on the final day as larger volumes of low yielding drought-affected clips combined with higher vegetable matter (VM) readings hampered the overall average prices at the final day’s auctions. The EMI when expressed in USD bore the full brunt of the weaker sentiment though and was the true indicator of sale room atmosphere and subsequently closed 20usc or 1.32% lower at 1497 usc clean/kg.

The buying from European interests continued unabated this week and price levels remained fully firm for all the best style and strength Merino wools finer than 19 micron. The premium pricing from Italian interests was again evident, and this series between 60 to 240 ac/clean kg above the general market levels. The first 1PP lot (14.4 micron) for quite some time was offered at auction in Sydney and was passed in for 4,500 cents greasy, but subsequently sold post auction for 4,600 ac.

Some strange and divergent results were reported this week as all three selling centres appeared to act independent of each other. The Sydney market surged forward and a general 20ac was gained, whilst Fremantle remained solid at the established levels. It was the Melbourne sale though that provided the best of buying opportunities for exporters, as that market drifted by around 25ac for the week. Notably, the largest local trading exporter and the two largest Chinese indent buyers easily made up the top three positions on buying lists, evidence of some positivity going forward.

Next week sees many of the trade in China, participating in the annual Nanjing Wool Market conference. This event is renowned as a bit of a bellwether week; a lead to the trends in the market is often provided. The conference is the single most important gathering in China-Australia wool industry relations and we congratu-late the Nanjing Wool Market for their 30th anniversary.

As the schedule this year sees the conference in China clashing with both selling days next week here in Australia, we expect the wool auction sales in a fortnight or beyond to reveal that outcome, rather than next week which currently looks like being a restrained week of selling as staffing and attention is somewhat diverted. A volume of a bit over 34,500 bales is currently rostered for sale.

AWTA Key Test Data - August 2018

• The monthly comparisons of total weight for August 2018 compared with August last season shows 7.0% less wool tested.
• The progressive comparison of total weight for July 2018 to August 2018 compared with the same period last season shows a reduction of 5.7% of wool tested.
• AWTA Ltd has tested 44.5 mkg (million kilograms) this season compared with 47.1 mkg for the equivalent period last season.

Wool forwards report - Southern Aurora Markets

The week started confidently with sentiment around supply and the weakening AUD delivering strong bids into the New Year. The result was hedge levels for 19.0 achieving 2250 in January and February and 21.0 reaching 2150 for early in the year and 2120 out to June. A lack-lustre week at auction has again confirmed the unpredictable nature of the current market and has exporters and processors reassessing risk on a daily basis. It also highlights the value of having prices in the market to capture the volatility and spread that risk along the pipeline.

Gaining price certainty over a percentage of the next shearing should be a target for growers. Forward prices offered at present (although discounted to spot) represent around the 90th percentile band for the last two years. That means that the spot market has only achieved those levels around 20 times in the last 200 auction days. The market may continue to go up from these levels and hopefully it will with new demand creation outstripping demand destruction that comes with higher prices. Valuing price certainty is fundamental to a risk management strategy.

AUD Commentary - Southern Aurora Markets

The Australian Dollar traded a surprisingly tight range this week, considering what’s been thrown at with Aussie generally trading the .7170 to .7215 range, with a low for the week of .7147 - that's a new 20 mth low, and a high of .7234.

The were several key economic updates this week, starting with the RBA Cash Rate left at 1.5% for the 25th consecutive month. ABS Data showed Australia’s GDP Data growth at 3.4%, the fastest pace since September 2012. underpinned by household spending. However that masked a heavy fall in the household savings rate, which fell to just 1 per cent in the second quarter, the lowest since 2007, and suggests that “expenditure is occurring at the expense of savings,”, Other key issues are flat wages growth, low inflation, falling house prices and a possibility of further China Tariffs increases of US$ 200 Billion.

Technically the Aussie has managed to form a base around .7150, lifting of this level several times this week, with solid buying. There is a case to say the Aussie is oversold and a small rally is likely, possibly back to .7360, however the bigger picture still has a negative bias, and the Aussie more likely to re-test the .7150 support, a break of that would target the next support .6980.