CURRENCY markets again provided a bonus for the Australian woolgrower with a massive drop in the local currency adding 50c to wool prices this week.
A very small offering of only 21,000 bales was put up for sale, which was the lowest volume offered in nine years according to AWEX, and this meant that there was little chance of the market easing too much.
AWEX’s northern market indicator closed up 51c on 2110c. The 17 micron indicator closed on 2869c, 18 micron 2538c, 19 micron 2374c, 20 micron 2356c, 21 micron 2324c, 28 micron 1052c, and 30 micron 709c.
Prices in US dollars meandered along with plus or minus 10c wrapping up most sections of the market. However, in Australian dollars it was a very different story from the outset as the Aussie crashed by more than a cent to plumb year lows against the US dollar on the Monday night on the back of fears about the US-China trade relations. It maintained this level of US73.5-ish for the rest of the week and so buyer’s US dollar indent limits in auction were suddenly much better.
Although the subdued overseas demand followed on from last week, and the general tone of the market in US dollar terms was slightly negative, Australian dollar prices surged by between 50c and 100c. Previously the focus had only been on the medium 19-22 micron Merino segment, but renewed interest was evident in the superfine sector as well this week. Even the crossbred market managed a mostly positive outcome with the finer edge climbing by up to 40c. With so few lots to choose from buyers were unable to be too selective about their purchases, as the cost of holding a part-shipment over for another week outweighed the cost of pushing the specifications a little bit further.
Overseas reaction to the early market reports was initially one of amazement given that most thought that the market had now stabilised and would perhaps build up a little speed on the downward run towards the recess. Then the currency was factored in and the US dollar quotes sent out, showing what most had expected. There had been some inquiry over the weekend for superfine and ultrafine Merino from China, some no doubt as a component in cashmere blends, but perhaps also in anticipation of renewed European interest in the coming season as well.
The basis between the superfine and medium Merino types had been narrowing in recent weeks as a result of the almost single minded focus on 21 micron from the Chinese processors. This week even with very small quantities available or perhaps because of it, interest was more widespread across the spectrum. 21 micron prices actually eased by US5c over the week, but 16.5-micron gained 10, and 19-19.5 types added US20c helping to restore the basis a little.
No doubt there will be some interesting gyrations between different categories in coming weeks, but overall it would be prudent to expect the extreme basis levels of this season to be reigned in a little. It is obviously affecting the ability of some brokers to price wools accurately as it is still astounding that 2 per cent of the offering can be passed in when 50c is added to already record prices.
Where the currency goes, so will the wool market follow, seems to be the most reliable prediction at the moment. Unfortunately trying to predict the currency more than a few hours ahead in this day and age is virtually impossible. ‘Flip-flop’ is a term that seems to have been adopted by the media this week to describe all manner of things from President Trump’s policy decisions, to Pauline Hanson’s voting intentions.
While the Australian dollar seems comfortable back down around US73.5c in part due the interest rate differentials in Australia and the US, the other major factor is the US-Sino trade situation, which is much more fluid and uncertain. The trade issue is yet to directly affect the wool market, and hopefully Chinese produced textiles stay off the list of items targeted by the Americans, but the bigger concern will be the Chinese consumer’s confidence. They now account for up to 50pc of consumption of wool at the cash register and as has been said many times before wool remains a discretionary purchase made when consumers are feeling good about their prospects.
If the economic outlook in China were to take a turn for the worse, and Chinese shoppers grow shorter arms and deeper pockets, we could see a drop in demand. At present there is no sign of that at a retail level, but the early stage processors are starting to talk about the difficulty they are having in moving current stocks. Generally they now need to discount their offering 50c to a dollar below the current market levels to conclude a sale, and so the gentle downtrend in US dollar terms will continue in coming weeks.
At this stage the forward roster for sales volumes looks quite low, but that can change quickly from week to week. So if early shearings, and a boost of new financial year wools do become available all of a sudden it might just be enough to bring about a correction to the current record prices. If the currency remains stable we should see a small easing in the wool market next week, but wool and volatility usually go together.