Dollar takes shine off uplift in Australian wool market

Wool Report with Damien Whiteley 

THE Australian wool market was a touch dearer in US Dollar terms this week, but for Australian growers the prices slipped when the strength of the Aussie Dollar came into play.

A weaker USD following the decision by the Fed Reserve to cut interest rates last week has seen the AUD surge higher. 

Also providing a boost to the local currency has been the improvement in risk appetite following the China stimulus announced last week, on top of our own RBA’s no change to interest rates here. 

A lower interest rate in the US, with more to come according to the markets, will be beneficial for consumer activity there. 

Stimulus in China is obviously directed at increasing the activity in the world’s second largest economy and hugely important for the wool market. 

So, while they provide a probably temporary boost to the value of the AUD and therefore take the shine off grower returns, they are actually beneficial in the big picture. 

Overall the market eased by 11 cents in local currency terms with merino fleece bearing the brunt of the currency movement. 

Prices were generally 10 US cents higher in most overseas quotations with the AWEX EMI rising by 6 cents on the weekly market report. 

In Euro the prices were pretty much unchanged, although those in Europe have bigger problems at this stage with sluggish growth still a major issue in the economies of Germany and France. 

Knitwear types and crossbred wools were the steadier wools this week as mills and traders concentrate on what they can most easily sell, and the marginal price increases for merino fleece over the past couple of weeks give buyers a reason to pause. 

The Nanjing Wool Market conference drew a smaller number of participants than in previous years, and Chinese traders were reluctant to open their wallets, preferring instead to sit on the fence and see what happens in coming weeks before making any outlandish buying commitments. 

The Chinese National Day holidays kick off on Tuesday and often mark the opening of the autumn/winter selling season providing retailers there with a good indication of what the season will be like. 

The announcement of a more expansive stimulus package than the financial markets had expected is seen as a positive sign and will hopefully add a bit of confidence to consumers in coming days and weeks. 

In unusually frank and forthright language the Chinese Politburo announced that China would implement “forceful” rate cuts, promote the stabilisation and recovery of the housing market, and that China would ensure necessary fiscal spending.

Implementing the instructions from on high, the mandarins from Beijing immediately trimmed the Reserve requirement ratio by 50bps, basically reducing the amount of cash banks have to have set aside, providing 1 trillion Yuan of long-term liquidity into the financial markets. 

They also reduced mortgage rates directly by 20-25bp and also reduced the deposit requirement for people buying a second home to 15 per cent from 25 per cent. 

Further tweaks included a 500bn yuan of PBOC funding for a swap facility for funds and brokers and another 300bn yuan for share buybacks, the PBOC also said it would cover 100 per cent of loans for local governments to buy unsold homes effectively positioning itself as a lender of last resort. 

All are measures aimed at reinvigorating the stalled housing market which has become a millstone around the neck of the economy. 

Some of these policy adjustments may have an immediate effect, and others will take longer to appear, but hopefully consumer confidence will be noticeably improved as property prices and their outlook has certainly been a drag on the psyche of everyday life in China. 

Whether these measures are enough remains to be seen, but the Government seems determined to ‘manage’ the economy sufficiently in order to hit their stated growth target of “around 5 per cent of GDP” so further measures may be released if needed. 

Either way, a more buoyant Chinese consumer is good news for the wool market. 

Other important consumers for the wool market, those in Europe appear to face more uncertainty with German IFO numbers continuing to fall, and manufacturing orders continuing to decline prompting some shedding of jobs. 

Likewise, in France, the numbers are not great with the PMI for both manufacturing and services in contractionary territory. 

In contrast, the USA composite PMI remains comfortably in expansion mode. 

This differing outlook will feed through to currency markets, and the action required by central banks in both economies. 

The big bang approach from the Fed last week may prove to be the correct approach. 

For the wool industry outlook things still remain delicately poised, although frustratingly inactive for many of us. 

Growers are increasingly reluctant to accept such low prices, especially when the futures market continues to indicate better returns are on the horizon. 

Cash flow requirements are dictating some decisions given the mounting feed bills and lack of decent spring rains, and grower stocks are building somewhat in broker stores. 

Any short-term recovery could well be snuffed out if auction quantities rise significantly, but the longer-term cyclical uptrend will eventually come into play, as it has done repeatedly over the past few decades. 

The global economic picture needs to get a whole lot better to sustain a cyclical upturn but with each passing week another box gets ticked. 

Copper, often portrayed as an economic bellwether took a sizeable price jump this week as markets felt more comfortable with risk and commodity ties in general.