The week at Australian wool auctions produced a rather mundane result considering the extreme volatility that has been the modus operandi of the market for the past few months. The trading busi-ness situation appears to be returning to normal, with relatively regular business being available around the daily price for the past fortnight. Movements in the very recent period have largely been supply driven, both on volume and wool type. 

The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) dropped 1.7% or 26ac to close at 1517ac clean/kg. Around a third of that weakness was currency driven as the AUD strength-ened week to week.  In US Dollar (USD) terms the USD EMI was just 1.1% lower or 12usc to see that indicator at 1029usc clean/kg level by the end of the selling week. 

The auction room action for the past two or so weeks has seen buyers showing far more control and firm, more committed buying. The acceptance of current price levels appears to be widespread. Most companies are committed to strategizing loss-recovery plans from the hectic financial results caused by the dramatic and speedy downturn in price.  

Traders again led buyers lists. Merino prices for both fleece and skirtings traded 30ac lower, crossbreds were 50ac cheaper and cardings remained generally steady for the week. 

The global economy is showing signals of better health with Brexit and the US-China trade imbalance dispute  seemingly on a much sounder footing. The initial retail figures from the northern Hemi-sphere early Autumn retail sales are still to come in, but hopes are they are good and can remain so, leading into the traditionally strong Singles day and Black Friday sales to come later in Novem-ber. 

According to capital economics, retail sales in China increased by nearly 0.7 percent in August of 2019 compared to July 2019. On top of that, China's trade surplus also increased to almost USD 40 bil-lion in September 2019 which is massively up from the USD 31 billion in the same month of last year. That surplus number exceed-ed expectations by a whopping 18 percent or 6 billion USD.  

Exports from China still produced a 3 percent drop compared to last year but this was offset by an import reduction of over 8%. For the year to date figures, the Chinese trade surplus increased to USD 300 billion from USD 220 billion in the corresponding period of the prior year. 

The above situation should be viewed as a big positive for Australi-an wool growers. Primarily, China accounts for importing 75% of our annual wool clip. In simple terms, 3 out of every 4 dollars wool grower’s receive comes from Chinese pockets. More importantly though, the Chinese domestic consumer now buys upwards of 45 percent of the final wool product, making China the largest con-sumer of wool in the world. 

33,000 bales is being offered next week, with significantly, Sydney only having a one day sale due to lack of willing sellers.

Forward Commentary

Both the forward and spot markets continued to struggle with the constant volatility. The forward 19.0-micron contract traded at 1770 for November early in the week. With the cash market having risen 50 cents from 1730 to 1780 the previous week indications were that the spot auction should be well supported. Some light volumes were trad-ed around cash on the 21.0 and 28.0 contracts. With sellers retreating and no serious follow through from the buy side volume dried up ahead of spot auction. Another reversal of fortune saw most merino types lose 30 to 40 cents Wednesday. Buying interest subsided and sellers remained off the pace.  

We have seen most phenomena in the market in the last year but not a significant fall only lasting a day. Sure, enough the market found support with merino qualities rising 10 cents. The 19.0-micron Novem-ber contract traded again at 1770 back where we started the week. Volatility might be the friend of the speculator, but it is not the friend of the farmer. Studies have shown a strong negative correlation be-tween volatility and farm incomes. Unfortunately, agriculture is the most volatile sector in the Australian Economy.  

Recently market commentators have put forward reasons for the col-lapse in wool prices. Most reasons are logical, and some say predicta-ble. All are viewed with the advantage of hindsight. Forward traded volumes suggest that it was predictable to only few if any. In excess of 50 contracts covering around 300t have been contracted for 2020 and 2021. Almost all are between processors and growers that value cer-tainty and margin management. 

AUD Commentary

It was a big news week in global markets, as firstly the British Pound soared to a 7 month high on news of a Brexit breakthrough after Boris Johnson secured a deal with the EU. The new deal sees North-ern Ireland remain in the customs union with the EU, however key Parliamentarians still oppose the deal. Upbeat comments from Chi-nese and U.S Trade Officials confirmed progress on Trade talks.  

U.S Stock markets also firmed also as Corporate earnings show that 82.5% of companies are reporting profits exceeding their forecasts, however that was dulled by U.S. retail sales in September which fell by 0.3% against the expected rise of 0.3%.

The Aussie Dollar rallied this week on better than expected Australi-an employment suggesting the RBA will no longer be cutting rates on Melbourne Cup Day. The data showed the unemployment rate edg-ing down from 5.3% to 5.2% with 26,200 full time jobs added. After opening on Monday at .6780, the AUD fell to .6723, before a sharp rally took it to a Thursday high of .6834. Today (Friday) it's slightly lower at .6822. 

Technically the AUD/USD is still oversold and a further rebound is likely however significant resistance is seen at .6846 then .6898, while support is found at .6710 then .6670. A break above .6898 could see rally to .7000. For the time being the AUD remains within a long term downtrend, and any rally will be short-lived.