A surging Australian currency took a toll on the Australian wool market this week with prices as measured by the AWEX EMI easing by 26 cents. However there is still enough demand around the world, and low supply across the globe to keep prices moving forward in USD terms, and that indicator rose by 9 cents with only the east coast selling centres operating.
Superfine merino types closed 40 cents lower, but some of the few available better tested lots fared much better than the bulk of the offering. Medium merino fleece wools closed about 30 cents lower but again buyers focused on better tested wools and also the few 22-23 micron lots available that are in short supply at present. Skirtings and carding wools performed a little better than the longer types this week and managed to keep losses to around 20 cents and the few lots of crossbred wools were similar.
The currency markets had a volatile week with traders pouncing on data releases beginning with the previous Friday night when US payroll numbers came in much lower than expected. Immediately the USD fell based on the presumption that the long awaited interest rate increase in the US would not be forthcoming as quickly as thought. This pushed the Aussie up by a cent, and it rose a further cent on Tuesday when the RBA indicated that, in their view, things are going well enough to sit on their hands for a while yet.
Commodities were upbeat, and the Australian dollar climbed a bit more. So when wool auctions closed last week the AUD was fetching .7224 and at the close this week it was buying just shy of .7500 USD.
The wool market has done well to maintain a reasonable level because if there was more volume available we could have seen a decline of up to 50 cents purely based on currency movements. Stock markets around the world rose, but particularly in New York as traders placed bets on the Fed Reserve not raising interest rates next week at its June meeting.
Money market and equity traders require at least some volatility to make short term gains, so it may turn out to be a pre-positioning move that will quickly be reversed if the Fed ratchets up the interest rate lever next week.
As Stephen Stanley at Amherst Pierpont said compensation rising faster than labour costs “is significant, as any time unit labour costs are rising faster than price inflation, it means that labour markets are exerting upward pressure on inflation”.
Stanley added that many economists are missing a “vitally important point about wages and inflation”, and the Fed would be aware of this. Despite the gambling by the markets and the surveys of economists taken in order to fill newspaper columns, the Fed will make a decision based on the big picture, and knowing that any change they make will need time to filter through the real economy. They are less concerned about the minute-by-minute reactions of currency traders.
The RBA in Australia is of a similar view, in that things are moving along okay, and they saw no need to change rates this month. In the wash out, volatility will remain in the currency markets, and while the AUD is on an upward trend wool prices will remain under pressure in local terms. The longer term should still see the AUD moving back towards fair value of around 65-70 cents.
What does all this mean for the wool market? Daily or weekly volatility will continue, and greasy wool exporters and wooltop traders will get a few more grey hairs trying to balance their books, but longer term we should be okay. Prices will more than likely maintain around current levels plus/minus a few cents until the recess.
In August and September our mettle will be challenged as more wool becomes available and retail buyers delay purchasing decisions until they see what the consumer reaction will be in the fall/winter selling period. Another group of Australian wool growers has toured Vietnamese processing mills and seen the expansion of the latter stage textile industry in Vietnam, and the growing presence of wool in the collections. Being comfortable wearing woollen polo shirts in the tropical heat surprised many, but proved to all that wool is a trans-seasonal product, not just cool climate clothing. Educating woolgrowers is easy, but convincing the general population is a much greater task.
Superfine Merino: There seems to be a reasonable base load of demand for superfine wool for both the traditional worsted suiting and the growing casual next to skin garments, and for well grown wools at the fine end the outlook is vey positive.
Medium Merino: Machinery does not stop during the July recess, so mills will need to keep buying greasy wool to feed their production lines, and the default lines of Type 55 and Type 56 for China will be the main focus for Chinese topmakers.
Crossbred Wool: China is still not keen to buy much volume of hand knitting types (28-32 micron) so while that is the case these wools will drift along slowly getting cheaper until the spring when a decision awaits.