Australian wool auction prices simply couldn't hang onto the highs set last week. The extensive gains of over 6 per cent in AUD (Australian dollar) terms simply could not be sustained, and the market was cheaper from the first lot put up for auction. At times it was difficult for the auctioneer to actually extract an opening bid. Subsequently a much higher pass-in rate was seen, and in particular, the Sydney market commenced to pass-in rates within the Merino fleece sector as high at 37% initially. The AWEX (Australian Wool Exchange) EMI (Eastern Market Indicator) shifted downward by 48ac/ clean kg or 2.27% to close at 2068ac clean/kg.

The EMI when expressed in USD was somewhat lessened by the impact of the movement of the forex (foreign exchange) rates used in wool buying and backed off to around half of the marginal easing that the AUD prices took. The USD EMI depreciated by 18usc or 1.11% to 1521usc clean/kg, moving to the favour of our overseas users. The major adjustment this week though was seen on the Euro levels which moved levels almost 3% lower week on week.

The less favourable forex rate of the AUD versus the USD (upwards of 1.5% as selling was underway) signalled the backward trend, but also some price sensitivity had been reached for the time being out of China as that market basically stopped any new forward contract orders for a few days. As the price backed off lower though, some fresh business was being written, as the factors that had elevated the wool price to where it was, hasn't changed.

Those underlying factors still remain firmly in play and hasn't been altered at all. There is still a dangerously low to almost empty pipe-line of raw wool in front of first stage processors. As the current bull run in market levels has been on-going for significantly longer than most would have predicted. Many manufacturers have stayed steadfast to the hand-to-mouth purchasing operation method that has been in play for many years now, which sees those users buying just in time to fulfil orders.

Global wool production is being severely hampered at present by climate and high sheep and lamb meat prices. Availability of well bred sheep to increase the wool sheep breeding flock is additionally hard to come by. When we see the drought’s stranglehold released on landowners, the price of those replacement animals may well be too provocative to consider, given the amount of expenditure currently being exhausted on keeping each farm’s core breeding stock in good health.

Given the combination of both demand from the consumer and the similar to now lowering wool supply facing processing machinery, it is hard to see what will break the back of the current cycle in prices that wool is experiencing. Yes, there are week to week inconsistencies, but the trend is firmly to the up-side and the severe movements presently gripping wool markets is indicative of both buyer and seller looking to try and establish and sustain their operations within the industry. If this means taking advantage of others’ buying strategies, the selling methods or the spikes and falls in volume of supply, then it appears they are doing so, and thus creating the erratic movements.

European buying continues and they continue to take the cream of the offering. Even though the market looked all lower, those better specification types were not at all significantly lower, perhaps 10 to 20ac is all that could have been taken off quotes for these better types.

Next week, all three auction centres are back in action with a volume of around 35,000 bales up for sale. This figure still remains far short of what is normally expected at this time of year in Australia.

Wool forwards report - Southern Aurora Markets

Forward volumes suffered this week as the market participants tried to digest the volatility of the opening three weeks of the new season. The largest single day rise for more than a decade, set last week, had the logical effect of pushing buyers away as downstream processors were unable to comprehend the new levels. The depth of the retraction is difficult to ascertain but significant volatility is likely to be with us for an extended period. Opportunities will be there for growers to hedge as exporters look to minimise their ex-posure in these uncertain times. Levels indicated by buyers where they see business may be contracted show an initial base forming around 2100 to 2150 for 19.0 micron and 2000 to 2050 for 21.0 as we move into the new year. Although a significant discount to the spot market it is still above the 95th percentile for prices (over the last ten years) indicating we have moved into a much improved price dynamic. Whether this can be sustained is the challenge.

AUD Commentary - Southern Aurora Markets

The rally in the Australian Dollar of the previous week was knee-capped this week by events related to Australian politics. This saw the Aussie tumble from Tuesdays high of .7380 to this mornings (Friday) and the week’s low of .7442…..should be .7238 While these events are of immediate concern in the currency market, they are not the macro drivers of the Aussie Dollar, as basically they have not changed, that is a strong U.S Dollar which is supported by a strong economy, rising inflation and a Central Bank that has forecast a series of rate rises over the next 12 months. In contrast, while Australian employment remains firm, the local economy is very China depend-ant which is in a tariff war with the U.S, and wages growth and infla-tion that remain stubbornly well the RBA’s target zone, as confirmed by Guy Debelle the Deputy Governor of the RBA in a speech yester-day. Bill Evans, the Chief Economist also said this week, that the local economy, and inflation were hostage to the very high levels of per-sonal debt, and he (Westpac) believes the RBA will be forced to leave rates on hold through 2019 and into early 2020. A resolution of the Liberal Party leadership is likely to see a relief rebound in the AUD today.

Technically the Charts suggest Aussie Dollar rally failed at .7380 and bias is now to the downside, with a re-test of the August the August low of .7201 likely. A break of that would likely see a fall to the next level of support at .7120. Today however, due to politics, there may-be a stronger than expected rebound that could see a rally to key resistance at .7425, however that remains still within the confines of a weakening currency.