Local results at Australian wool auctions this week suggested a weakening wool market has become the trend, but in reality, the market is reflecting the adjustments for currency rather than wool value or demand. The Australian dollar (AUD) is staging somewhat of a recovery as the rate against the US Dollar moved towards the 0.73 level after sitting in the 0.71’s for a week or two. This impacts negatively upon local AUD auction prices. The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) fell 27ac or 1.3% to close at 2067ac clean/kg. In USD terms though, the indicator barely moved and just 3usc was lost as that indicator closed the week 0.20% lower at 1501 usc clean/kg.

The wool market appears to be on tenterhooks at present and a stalemate situation seems to be in play. Overseas factories are requiring raw material, as it is common knowledge that stocks of greasy wool in front of machines is dangerously low globally. What is the “right” price to pay is the most vexing of questions that many are faced with, as it is still unclear whether the retail sector can pass these levels fully on to the consumer. Many users are actively looking for some forward coverage, but are unable to get set from their usual suppliers. The local exporters are playing a very cautious game and seem unwilling to go too far forward and carry an exposed open position. So, those users needing immediate supply revert to the indents, of which the largest Chinese indent buyer completely dominated the buyers lists week on the Merino fleece wools.

European interests remain energetic in the market and some impressive purchase numbers have been recorded in the past few weeks for wools destined for production in the Euro zone. This week the largest Italian operator flexed their purchasing muscle and bought almost 2,000 bales to add to their impressive season tally thus far. The new season clips from the traditional super fine wool growing areas of Australia are being presented in top condition and are obviously satisfying the needs of the premier buyer of quality Australian wools. As has become synonymous with the Italian purchases of the past few seasons, the price premiums being paid are also quite impressive, and many lots are achieving returns of over 300ac clean per kg above and beyond the published price guides.

An agricultural/textile issue that arose from the recent Nanjing Wool Market (NWM) conference was the major counter measures the Chinese are undertaking against the US tariff increases. The increase of the duty payable on import of American cotton is a major move, as over 1 million tonnes per annum is imported from the USA. This is perceived by some Chinese as somewhat of a contradictory measure as the higher quality of the US cotton is required to lift overall quality of locally produced cotton. No reduction in import is anticipated, yet the higher cost of raw material will hurt the local industry. If escalation continues it was suggested that some orders will move to South East Asia, or indeed, the Chinese businesses themselves will move out of China. A flow on effect will be higher prices for Australian cotton as we grow similarly high demand, best quality cotton, but our volumes are far too low to satisfy the Chinese manufacturing needs and of course drought.

In the wool textile area, it was revealed at the NWM conference that the Chinese manufacturers are presently fixated on their domestic retail markets rather than the traditional higher margin export or foreign trade. This is a move not only to extend margins but also to satisfy the growing trend in younger Chinese consumers who are moving from imported goods to quality locally made garments.

35,000 bales is scheduled for auction in Australia next week and largely the same patterns are expected with spot currency fluctuations the most likely key to market direction and subsequent results.

Wool forwards report - Southern Aurora Markets

The forward market was stagnant this week with participants looking for direction from off shore. The spot market lost ground with the softness in the medium wools, evident last week, seeping into the finer qualities. Sentiment is quite mixed with the buyers uncertain on the balance of factors that are influencing both the nearby and forward markets. The current price structure is damping short and medium term demand with end users unable to execute new business at these levels. Countering this bearish outlook is the current low level of stocks off shore and the supply concerns for the coming season which has the latest clip forecast at -5.7% and anecdotal evidence even lower.

Bidding in the forwards were a little muted as buyers reassessed risk. However, levels still remain in the 85 to 90 percentile range with 19.0 micron bid in November at 2260, December at 2240 and January at 2200. Similar levels are bid for 21.0 micron with November at 2180, December at 2160 and 2100 for January.

The past two years has seen auction market a sustained rise. With the advantage of hindsight, a forward hedging strategy has been unnecessary. Given the current price dynamics growers should be looking at becoming price makers, not price takers, for their clip. By understanding the cost of production and setting a targeted profit margins growers can gain certainty over their wool returns. The percentage of the clip to hedge will vary depending on the individual grower’s appetite for risk and any production concerns.

AUD Commentary - Southern Aurora Markets

Despite the escalation and rhetoric in the U.S and China Trade wars, with $200 Billion in new Tariffs announced, the Australian Dollar powered higher this week, lifting off Monday’s low of .7142 to a high today (Friday) of .7294. The AUD was helped higher this week by a softer USD which was under pressure on global trade and slow progress with the NAFTA (Trade) deal with Canada. Aside from that, U.S Economic data remains robust with the Federal Reserve almost certain to lift interest rates by a quarter of a point next week. Also U.S employment is very strong with data showing Unemployment claims dropping to a fifty year low.

Overnight also the Dow Jones Index and the S&P500 both hit new record highs. Yesterday the WTO asked the United States to explain its planned $12 billion aid package designed to shield U.S. farmers from the repercussions of trade disputes. Australian data was mixed, with the Westpac-Melbourne Institute Leading Index signalling a slowing down of growth into the second half of 2018 and 2019. Westpac’s Chief Economist Bill Evans said that headwinds for growth remained, as the uncertain outlook for the consumer spending, with weak wages growth, falling property prices, high personal debt, a slowdown in jobs growth and political uncertainty.

Technically the AUD is showing some short term upside bias, and is consolidating near the highs of this weeks rally. The bullish tone suggests a further extension possibly to the .7390 resistance, however any rally should be limited in nature, and we would expect then the market to fall back to the key support at 7084.