Weaker Aussie dollar preserves wool prices

Weaker Aussie dollar preserves wool prices


Analysis
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Unfortunately for Australian wool growers, the past month of wool auction price activity has mostly gone against them.

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Unfortunately for Australian woolgrowers, the past month of wool auction price activity has mostly gone against them.

The last week of sales in May provided some positive direction as the market inexplicably shot 54 cents a kilogram dearer in that one week.

This led to the Eastern Market Indicator (EMI) closing that series at 1887c/kg.

Since then, the market has had consecutive falls to result in the EMI trading 121c/kg or 6.4 per cent lower at 1766c/kg with just one week left of the 2018/19 selling season.

In US dollar terms, the market has experienced retractions of similar magnitude to the Australian dollar falls.

As an estimated 70pc of the Australian clip is exported using a base US dollar contract, the US indicator is often the better barometer of wool demand.

The end of May US dollar EMI of US1308c/kg has fallen US90c/kg or 6.9pc to US1218c/kg.

In US dollar terms the EMI has not traded at these levels since October 2017.

Marked and significant fluctuations in all the foreign exchange cross rates used in the wool trade with China have become the norm.

During the past 12 months, the Chinese yuan has weakened to the current level of 6.87 yuan against the US dollar, compared to 6.37 yuan back in May 2018.

This means Chinese made exported product is worth 7.3pc less in yuan if sold at a similar US dollar price to 12 months ago.

This is almost certainly a best case scenario given the tough trade environment of the period.

Concurrently the Australian dollar has fallen from the June 2018 level of about 0.75 against the US dollar to today's rate of 0.68, a 9.3pc drop.

So, in net terms, the Chinese are still a few per cent ahead in terms of using yuan to buy US dollars than using that US dollar to buy Australian dollars to pay for greasy wool.

This cross rate situation has helped to maintain the relatively high wool price levels under the softening of retail price and demand scenario of the past 12 months.

This has seen record-breaking levels on almost all wool types, with the local wool market peaking earlier this season in August 2018 at a 2116c/kg EMI.

Most foreign textile trade companies express that a stable exchange rate is best for profits across the industry, however in the past year, the weakening Australian dollar has certainly assisted in preserving local prices.

With global supply at such low levels not seen for several decades, it could be somewhat assumed that prices should be heading up.

It the case of most commodities, demand is the key.

There have been several negative factors affecting demand.

The primary reason is the general deterioration of the global economy.

Brexit has played a negative role across Europe, whilst the ongoing US/China tariff war affects those nations predominantly, the flow on effects are being felt across many nations.

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