The final sale of the first half of the calendar year of Australian wool auction sales produced very little variation or significant movements in price. In what ended up being quite a benign week as far as activity goes, buyer and seller levels of acceptance approached normality (8.5%) after the high passed in rates (15.6%) of last week. The AWEX (Australian Wool Exchange) EMI (Eastern Market Indicator) reduced by just 0.6% or 13ac to go to the recess in sales at 1981ac clean/kg, a remarkable 459ac higher year on year. The EMI expressed in USD was also unremarkable and drifted downward by 8usc to 1463usc.

The foreign exchange (forex) rates of the CNY versus the USD continues to be problematical for Chinese importers and manufacturer’s currency risk strategies. They need the RMB/CNY to buy USD in order to purchase and import wool. As the CNY is not a true floated currency it is difficult to hedge properly. It appears on the surface that this rate is being used to combat or inflame the US v China attempts to balance the trade between those two countries. Others call it a trade war, but it appears far wider tactics are being employed other than tariffs to achieve that same balance result that the USA is looking for.

This week the foreign exchange (forex) rate of the USD remained stable here against the AUD whilst the CNY strengthened by almost 1% against the AUD. The US rate almost mirrored the auction price movement as that strengthened, the local AUD auction market decreased. Whilst the weekly comparison shows just a 0.1% strengthening of the forex, the rates during the actual auction selling time was well over 0.74 reflecting the 0.6% reduction in general AUD price levels.

The past few weeks have seen almost 80,000 bales sold to the trade, this has alleviated to some degree the pressure on access to supply for the time being for overseas manufacturers. Global stocks of wool and particularly the Merino quality for apparel is still dangerously low. We are in midst of the quiet period in retail for wool, ie the Northern Hemisphere summer, and we will need to wait a month or two before production needs to be ramped up to supply the upcoming peak period of fall and winter, and then the pressure will be exerted once more on supply.

The buyers list this week was once again dominated by Chinese indent operators in both the Merino fleece and Crossbred markets, whilst processors and traders were in full force across the skirting and carding markets.

Market movements in Merino fleece were minimal in percentage terms with wools 17 to 19 micron just firm to maybe 10ac lower in parts and wools 19.5 micron and broader 25ac lower. Despite this slight drift, competition was much better than the previous week which saw some big price adjustments down. Skirtings and cardings behaved similarly and reduced a general 15 to 20ac and crossbreds traded 25 ac lower for the finer end of the offering, but appreciated by 15ac on the broader wools.

Please note that sales have now ceased for a period of three weeks and will resume in the week commencing Monday 6th August 2018.

Wool forwards report - Southern Aurora Markets

The auction market closed for the recess looking to find a level. With buyers looking to clean up shipments prior to the break there was considerable variation in demand between micron and selling centres. The forward markets remained patchy with buyers and sellers alike finding it difficult to ascertain fair value. New forward business is difficult to write at current spot levels. Downstream processors are having to deal with the disconnect between the current market for tops and yarn and the current replacement level. Spring traded for 21.0 September 2150 and October 2120. This would indicate that market is looking to return, in the medium term, to the May which averaged 2100 but with a wide range from 1970 to 2250. Bidding levels for summer and the new year highlight the uncertainty as we move further into the new season. That said it was pleasing to see trades out in 2019 with growers achieving prices in the 90 to 98 percentile band. The growers hedging 21.0 microns for 12 to 18 months out are locking in prices that have been only been achieved 2 to 3 percent of the time in the last decade.

Valuing certainty over the fear of lost opportunity.

AUD Commentary - Southern Aurora Markets

The Australian Dollar (AUD) had another volatile week, with the gyrations in the Chinese Yuan (CNY) and the trade war rhetoric between the U.S and China being the major influence. The AUD dropped from Monday’s high of .7484 to a low Wednesday of .7358, before lifting quite sharply on Friday to .7410. After being the worst performing G10 currency on Wednesday, the AUD took out the title of being the best performing currency on Friday. That lift coincided with the release of the U.S Consumer Price Index which showed Inflation rising to 2.9% for the year to June, the highest in six years.

Surprisingly, despite those numbers, U.S 10 year Bond yields were steady at 2.849%. Also the NASDAQ closed at a new record high, with Facebook, Microsoft and Amazon also closing at lifetime highs. Sal Guatieri, the Senior economist at BMO Capital Toronto said the U.S economy was expanding, and inflation had lifted due to a nearly fully employed economy, higher energy prices and some nudging from tariffs”.

Meanwhile in the Australia data released by the Westpac-Melbourne Institute showed Australia’s inflationary expectations declined in July. Economists say that while it's likely there will be a slowdown in Chinese growth, that’s not a negative development, as in recent years Chinese growth was fuelled in large part by a massive expansion of credit and bank lending.

Technically, the AUD remains trapped within a large sideways pattern, however it does have downside bias, and is likely to re-test support at the 18-month low of 0.7310. A break below that could see a quick fall to .7225, then to the December 2016 low of 7155. On the upside, resistance is found at .7484, the high of July 9, and a break through that could see a rally to the June 6 peak of 0.7675.