Australian wool auction prices finally succumbed this week to the price resistance that has been simmering for a fortnight. All wool types and descriptions on offer were adversely affected to varying degrees, but it was the carding sector that was hardest hit bearing in mind though that all wools broader than 18.5 micron are coming off the strongest Spring levels seen. The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) fell by 2.6% or 54ac to close at 2013ac clean/kg for the week.

In US Dollar (USD) terms the indicator also shifted well and truly to the buyers advantage and fell 3% or 45usc lower to 1456 usc clean/kg by the close of selling. This is the lowest that indicator has been since the second week of May. Not only were the USD users advantaged, the Chinese Yuan equivalent indicator was 2.6% lower, but it was those manufacturers using the Euro who extracted the most discount as that indicator was 3.15% lower across all wools.

The declining fortunes of the short term market are thought to have partly originated from local buyers here in Australia rather than wholly from overseas. The sentiment from off shore Chinese traders, agents, users and manufacturers was perhaps considered to be too negative, and therefore too much of a risk for the local buyers to keep backing the market speculatively. As such, a few of the largest local buyers appeared to simply step away from their normal purchasing behaviour and intensity. With such heavyweight buyers out of the major action, the inevitable cheaper market eventuated.

European interest remains evident in the auction rooms and purchasing power is very strong on all better wools finer than 19 micron. Those European buyers surely must have enjoyed the lack of normal pressure being applied from the competition from other buying destinations, but additionally the exchange rate went their way. The Sydney market once again was a designated superfine sale and the offering suited the Italians in particular, as many clips of best top making and spinners wools were available. Of course, these Italian interests completely dominated the sale rooms on these types and their premium prices could not be matched or bettered.

The question being posed for overseas mills as to what is the “right” price to pay has become a more urgent one to answer as each passing week sees no evidence of a surge in volume of wool becoming available, particularly Merino. Another key factor is declining quality within much of the selection. The clips from drought affected zones have yields that are becoming increasingly harder to place into standard type contracts. With many users urgently needing raw material to run on their machines, the 6% price reduction in USD terms over the past six weeks must surely see some of them ready or closer to executing some significant forward coverage.

The selling week was somewhat disrupted as markets were split over three selling days, giving rise to some uncertainty in sale room operations. The state of Victoria (Melbourne centre) has a public holiday today, so their selling was brought forward a day to Tuesday/Wednesday selling earlier this week, whilst the other two centres remained Wednesday/Thursday sale days. The West Australian public holiday held earlier this week on Monday and the NSW public holiday next Monday had/ will have no impact as the normal sales schedules were and will be adhered to.

Merino fleece and skirting types were generally 50 to 60ac lower for the week, except the best wools destined for Italy of 19 micron and finer which were just 25ac lower. Crossbreds were cheaper by 30ac whilst all cardings lost significant ground with falls of 100ac.

Next week has a substantially larger quantity of 42,500 bales being offered and some new orders will be necessary to stimulate activity.

Wool forwards report - Southern Aurora Markets

Light trading in the forward markets this week reflected the uncertainty that surrounds the wool landscape at all levels. The balance of supply and demand will ultimately decide the outcome. Demand creation and steady supply has seen the spot market rise to set new highs over the last two years. The ability of the pipeline to sustain these rises continues to be questioned. At some point high prices will cause demand destruction shifting the balance in the market. The forward markets have wrongly indicated this for much of the last two years trading at a discount to spot anticipating a price driven correction.

The current retraction in the spot market of around 100 cents is in line with the previous seven pull backs over this two year period. The question is does the market need to come back further to meet the expectations of downstream processors and consumers or will tight supply due to the sustained drought conditions halt the downward trend.

Forward market levels for October and November indicate exporters willingness to cover some of their risk at close to spot. 21.0 is bid at 2150 about 1 percent under spot. 19.0 micron for the same period at 2260 about 4% under cash.

Light volume on the sell side from growers can be partly attributed to fatigue bought about by the significant discounts the forwards have delivered over the last two years. The moderate discounts and the outright level should now be the focus. Valuing price certainty for part of the next clip, particularly during these tough times, should be a strategy worth considering.

AUD Commentary - Southern Aurora Markets

The Australian Dollar fell to the weeks low today, Friday of .7202, well off the mid-week high of .7308 and Monday’s open of .7280.

The primary driver was a surging U.S Dollar which rose after the U.S Fed Reserve lifted the Federal Funds Rate 0.25% to 2.25%, citing strong economic growth, a tighter labour market conditions and inflation. The Fed also foresees another rate hike in December, three more next year, and one increase in 2020. The Fed also predicts the U.S Economy to grow by 3.1 per cent over 2018, and that was supported overnight with the release of GDP showing an annual growth rate of 4.2 %. Despite the rate hike, the Dow Jones, S&P500 and Nasdaq remain at record highs.

In Australia, positive news also, as Australian job vacancies hit a record high in the three months to August, as private sector vacancies surged by 20.3%. Coupled with a decline in unemployment over the same period, this indicates that labour market conditions are tightening and wage pressures rises are building. In other news oil prices continue to rise as fresh US sanctions come into force against Iran, the world’s fifth largest oil producer, also the WTO lowered 2018 trade growth projections significantly, warning that “escalating trade tensions and tighter credit conditions will slow trade growth for the rest of this year and in 2019”.

Technically the AUD has a negative bias after breaking minor support at .7238. This suggests that the recent rally to .7308 completes the corrective rebound from 0.7084. The next support is found .7145, and a break of that is likely to see the low of .7085 tested.