This week the Australian wool auctions again produced results that are symptomatic of the volatility that surround wool pricing at present. On the back of last weeks sharp decline the lower prices helped extract fresh business from overseas users. This caused prices to revert upwards on most sectors. Short term trends have been non existent now for the past few months, indicative of an industry struggling to find a safe and profitable levels of trades.

The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) gained 32ac or 2.1% this week to close at 1543ac clean/kg. In US Dollar (USD) terms the strengthening of the AUD saw the USD EMI appreciate even further by 2.6% or 26usc to close at 1041usc clean/kg level.

Coming to the fore at Australian auctions is the variability of supply constraints that can either aid or weaken markets. The last three months of sales that had relatively large weekly auction offerings (35,000 bales +) has generally seen prices weaken whilst the smaller sales produced far better results. Whether this is coincidental and those sale weeks aligned with prompt demands needs is not yet clear.

Last weeks AWTA key test data figures revealed what most were thinking showing that Australian wool production has decreased by 14% already this year. On top of this, a good proportion of the wool grower sellers are resisting any further price decreases as they either withdraw their wool prior to auction or pass in their wool if the price offered fails to meet their expectations.

The above situation should come as a supply warning to the trade, as wool growers are the most aware of all participants as to what volumes are likely to be produced. The message from many wool selling brokers is quite clear. A lot of the growers affected by drought are now in a position to not have to, or need to, sell their wool. Unfortunately this is because they have sold their sheep at good prices and in many cases, it is core breeding stock that has been off loaded.

Merino wools of all segments were dearer and pulled back 30 to 60ac of last weeks losses. Crossbreds appreciated by 25ac but cardings fell away 15ac after a few weeks of bucking the trend by being dearer whilst all other sectors weakened. Withdrawals plagued the auction scene as the original quantity of 34,000 bales was reduced by 18% to 28,000 bales.

40,000 bales is being offered next week.

Forwards Commentary—Southern Aurora (SA) Markets

The roller-coaster ride continued in the spot market once again rallying off a dramatic pull back. Since the start of the season we have seen the Eastern Market Indicator (EMI) fall 411 cents (24%) then rally 266 cents (19%) only to fall back 98 cents last week. Opinion is divided on the strength and longevity of this current rally which has seen the EMI rise 32 cents.

The supply and demand balance are in question with reports of building early stage stock in China countered by the ever-eroding supply particularly in NSW and Queensland. Demand seems to be stagnated and oscillating on the whims and rhetoric of the China USA trade negotiations. This continued uncertainty has seen volumes in the forwards dry up and be concentrated in the short term, pre-Christmas, window.

Buyers seem to be keener to try and reduce risk with trades this week at and above cash. 19.0 traded at 1765 and 21.0 at 1750 for November maturity. Growers remain reluctant to offer without a substantial premium. This is understandable as many growers that covered during the sustained rise over the recent seasons had gotten weary of negative hedge results even with the knowledge that the strategy was sound. This is borne out in the current analysis of the open positions in the forward market. The average covered price 19.0 micron is October 1913/ November 1839 and December 1844. For 21.0 microns the levels are 1897,1772 and 1837 respectively. Around 8,000 bales are hedged for this period which is about 2% of the expected auction receivals for the quarter.

We expect interest to be maintained from the buy side. Some confidence seems to be restored in global markets to end the week with current indications that trade tensions at worse neutral and potentially improving.

AUD Commentary—Southern Aurora (SA) Markets

The AUD traded in a tight range with a downward bias this holiday week. Domestically the focus was on the lack of economic strength with the Westpac consumer confidence index hitting a four-year low - even with three rate cuts and tax rebates starting to flow. The debate around what should be done by government and the Reserve Bank kept the commentariat busy. The possibility of further rate cuts or quantitative easing by the RBA has some questioning the effectiveness of the traditional stimulatory policy levers. The change of emphasis from the RBA on getting the unemployment number down will mean the release of employment statistics next Thursday will be keenly anticipated by market watches.

Likewise, analysts will be alert on Tuesday when Deputy Governor Debelle speaks following the release of last month’s Reserve Bank board minutes. In offshore markets, talk of a meeting between the US and China on trade negotiations had the market buoyant late in the week, but we know that can turn on a tweet! Hopefully impeachment developments keep Trump’s mind focused elsewhere. A sniff that some ground was being given on Brexit also had the pound higher. We continue to maintain a downward bias for the AUD on economic weakness and stimulatory measures. A significant breakthrough on trade negotiations between the US and China will likely see the fortunes of the AUD reverse.