Simply staggering results were achieved at Australian wool auctions this week. Before the start of sales, the substantially weaker Australian dollar (AUD) of at times 3.2% against the US Dollar (USD), clearly signalled the market was headed to dearer territory. The AWEX (Australian Wool Exchange) EMI (Eastern Market Indicator) eventually improved by a massive 126ac or 6.33% to close at the highest ever level of 2116ac clean/kg. These are both record daily and week ending levels since the EMI has been published. These prices are now over 500ac or 31% higher than last year.

The EMI when expressed in USD gained significant ground also but nowhere near the extent of the AUD gains. The USD EMI appreciated 59usc or 3.96% to 1539usc clean/kg, falling just 1usc short from matching the record level of 1540usc set back in the first week of June 2018. Interesting to note that the AUD EMI was then over a full dollar lower at 2011ac, giving rise to the benefits of the lower AUD rate against the USD in extracting Aussie wool growers more of their local currency whilst overseas buyers pay the similar price. which gives rise to more sustainable pricing at these levels. Additionally the year on year comparison shows a 20% gain in the USD EMI which is vastly less than the above mentioned appreciation in AUD levels.

Fresh business being written at full market price was being openly discussed on show floors pre sale and compellingly, all three major destinations of China, India and Europe were being mentioned. The ensuing levels though took all participants by surprise as the physical market eventually doubled the most significant of gains that were expected. Competition could only be described as being of a most aggressive nature, but surprisingly there was no perceived evidence of any so called “panic buying” which is usually associated with rises of such magnitude. Buyers appeared to be comfortable purchasing at these levels, and this would seemingly give positive endorsement of the short term prospects of the wool market.

While it is clearly established that improved demand for wool had taken the market from 955ac in August 2012 through the 2000ac mark in just six years, the lack of global supply is now accentuating that already entrenched increasing value. A startling offering scenario is firmly in buyers minds, as already this season there has been a 14% shortfall in bales sold to the trade compared to the first four weeks of last season. Indeed, the next three weeks of scheduled sales shows a forecast offering that is 17% less than last year.

The NSW wool market is producing some surprisingly good quality offerings, despite that state being 100% drought declared. From the Western and south western districts there are some low yielding wools, but underneath the dirt, the wool is of good strength, is even in length, of good colour and the crimp definition is even along the staple. The South Australian clips from above the Goyder’s line is similar in quality but some very low yields are being seen. Below that line some very good quality clips are still available. From all other states, quality is on par with previous seasons as climactic conditions are normal and rain has largely been timely and plentiful.

European buying became even more evident this week and again was leading the market on the better specification types at the finer end of the Merino offering. Perhaps this is even a more bullish trend indicator, as the Euro v AUD forex rate failed to give those buyers any respite as the Euro EMI (+5.95%) moved pretty much to the same margin as the AUD gains(+6.33%).

Next week sees auction quantities drop substantially to just over 29,000 bales. “Wool Week” is on in Australia so we move to a Tuesday and Wednesday schedule with no Fremantle sale.

Wool forwards report - Southern Aurora Markets

Another challenging week for buyers. The small offering at auction saw prices across all microns again chases new highs. Reaction in the forwards has been less dramatic with both buyers and sellers alike trying to find fair value into the summer and beyond. Spring levels rose shapely with 21.0 trading at 2280 for late September. Buyers are pricing in significant risk for the new year with processor and end user concerns about the ability to pass on the latest surge in prices foremost in their minds. Unprecedented levels are being bid into 2019 but at discounts to cash. 19.0 microns traded at 2225 for January and 2105 for November. We expect a similar pattern to continue next week with both exporters and growers both looking for some price certainty into the future. We anticipate only moderate volume under the current volatility.

Riemann Wool Platform -trade summary

After holding steady through most of July and early August at around .7400 cents, the Aussie dollar tumbled this week, hitting a low on Wednesday of .7201, before finding support with a rally yesterday on the release of Australia’s Employment Report and sharp fall back in the U.S Dollar from its 13 month high. In fact the Aussie out-performed in the overnight rally, and today, Friday we are trading quietly at .7265, after an overnight high of .7286. ABS Data on Thursday showed the Unemployment Rate edging lower to 5.3%, the lowest level since 2012, however the economy shed 3,900 jobs against the forecast gain 15,000, and that contrasted to the gain of 50,900 in the previous month. In the bigger picture the two key drivers of the weakening AUD remain in place, very weak wages growth and high domestic debt levels. Both of those lead to an inflation rate well below the RBA forecast and weak consumer spending levels. Westpac’s Chief Economist Bill Evans has for several years forecast that the RBA will be forced to leave rates on hold at this record low through 2018 and most of 2019 as well, and he added that there are concerns over the health of Chinese economy as well as the effects of a continued fall in domestic housing prices.

Technically a temporary low is in place at 0.7201 and after the overnight rally the market has a neutral tone. We do expect a further short term rally, targeting resistance at .7354. A break of that could see a rally to .7464, however the suggestion is the AUD is likely to resume the fall, and will re-test .7201.