As the chaos caused by Covid-19 ravaged almost all global markets this week, Australian wool prices appeared to be riding out the carnage relatively unscathed. A week’s price loss of 5.5% is never good but when other markets were losing that percentage value in half a day throughout the week, the result at Australian wool auctions wool looks on face value as relatively strong. 

However, the real story from this week revolves around the US dollar ascending into stratospheric levels against the Australian dollar. The dramatic depreciation of the AUD by over 13% effectively masked the heavy price erosion of our product in real terms. Over 70% of wool is traded using foreign currencies, all of which have appreciated by 10.5% to 13.7% against the Australian dollar on a week to week comparison. In troubled times investors flee to safety zones, and gold and the US dollar are safe havens for storing cash at present.

The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) dropped 83ac or 5.5% to 1438ac clean/kg. As described above, the USD EMI more accurately represents the damage done to the wool price. The USD EMI  fell a staggering 18.4% or 181usc over just three days of selling and ultimately recorded a weekly closing level of 801usc clean/kg.  

One didn't need the foresight of Nostradamus to predict the events that occurred this week. Price falls exceeded 100ac on much of the Merino offering. What is also abundantly clear is, as with all other markets, these highly negative movements are the result of unprecedented events of a global scale and not just specific to the wool industry or Australia.    

Chinese top-makers and trading exporters to China dominated buying lists this week. European and other non-Chinese interest appears to have deserted the auction rooms, apart from some specialist super fine and declaration-specific operations. Whist the price was deteriorating rapidly, the interest from China remained quite strong. Word from many sources suggested many of the factories in China are now returning somewhat to normal following their disruptions since the Chinese New Year on the 25th January. 

Once again this week, a large portion of grower sellers were reluctant to accept the lowering levels and AWEX subsequently reported a 26.5% passed in rate for the week. The majority of wool passed in was in the Merino fleece sector. No doubt there is a mounting grower stockpile of bales being held off the market. With the movement of stock, equity and share markets substantially lower, those bales may eventually prove to be a better investment than most personal investments or superannuation funds.

Thankfully for sheep farmers fortunate enough to be fully stocked heading into Autumn/Winter, our domestic meat markets are holding strong at historical highs. In a cruel twist this heralds a situation that could be further damage future wool production . 

The problem is two-fold in that wool sheep will be sold into an attractive meat market in the coming weeks and months prior to winter, and secondly, breeding decisions may turn or have turned to the sheep meat breeds rather than good wool producing animals. All of this on top of the drought conditions that either continue, or continue to effect those in recovery mode trying to get a viable livestock operation back into business on farm.

Next week has almost 50,000 bales scheduled for auction. Melbourne will again sell over three days commencing Tuesday and Sydney and Fremantle will sell two days from Wednesday.

AUD Commentary - Southern Aurora (SA Markets)

By Garry Booth

These are unprecedented times as this week Central Banks globally have acted in unison to lower interest rates to new record levels and inject stunning amounts of liquidity into the Banking system. Overnight the U.S Federal Reserve went further and reached out to 9 other Central Banks making available large volumes of U.S Dollars. This being the third emergency credit program in two days, and that’s after dropping the Fed Rate to near zero last Sunday. The Fed is now using “quantitative easing” in the Bond Markets while President Donald Trump’s administration has announced stimulus programs in excess of $US 1Trillion. 

In Europe the European Central Bank (ECB) pledged to buy 750 Billion Euro’s worth of Bonds . Overnight also the British pound fell to its lowest level against the USD since 1985. The Australian Dollar had a horror week falling from Monday’s high of .6302 to Thursdays low of .5508, not seen since October 2002, before lifting today (Friday) to .5710.

However, on a brighter note, Australia’s February Unemployment Report released yesterday, was remarkable, showing 26,700 new jobs being added and the Unemployment rate dropping to 5.1% against the 5.3% expected. On Thursday the RBA Governor Philip Lowe took the unusual step of cutting interest rates again to a record low 0.25 per cent and then made the extraordinary announcement that the Reserve Bank will buy Australian government bonds as part of its first-ever quantitative easing program. The RBA said it would also provide at least $90 billion at 0.25% to banks to lend to small and medium-sized businesses.  

Overnight the Dow Jones Industrial appeared to hold as it rose 189.63 points, or 0.95%, to 20,088.55, while Crude Oil prices rallied 24% from 18 year lows to close at $25.22 barrel.

Technically the AUD is very oversold as shown by the sharp lift off the overnight lows, and a further rally is likely to resistance, possibly to .6000 cents, however the bigger picture remains sharply negative. It should be noted that Central Banks around the world have signalled that global FX intervention to support their local currencies is being considered. Technical traders suggest a fall .4773 (2001 low) is possible. In the meantime we expect a re-test in the weeks ahead of yesterday's low of .5508. 

Forwards Commentary - Southern Aurora (SA Markets)

By Mike Avery

The forward market chugged along as the spot auction tried to cope with the uncertainty that has become the new normal. Trade volume was slightly higher but prices reflected the increased risk that uncertainty brings. Forward prices mirrored the auction with Spring levels peeling back 100 cents. Early in the week buyers factored a spot to spring/new year discount of 100 cents (1750 spot to 1650 forward for 19.0). By weeks end the spot auction 19.0 index had fallen to 1653 and October 19.0 forwards were trading at 1550. 

Trade was restricted in the main to spring 2020 through to winter 2021. This is in some part due to the uncertainty around nearby supply chain issues and flow of Letters of credit. The weakening Aussie Dollar has seen the EMI fall 18.6% in USD terms this week.

Just were we go next week is any bodies guess. Much will depend on the containment measures being put in place, their effectiveness and their short-term affect on supply chain flows. Looking at the forward market we are seeing some demand into the spring at discounted levels. 19.0 micron is bid at 1550 September through to October. Forward prices in the near-term window will likely be harder to come by as exporters manage cash flow, volatility and contract execution.