AWI Points to Role of Exchange Rates in Wool Market
July 6, 2018

The major factor in the rapid turnaround in the fortunes of the local Australian markets is the significant movement of the forex rates of the Chinese Yuan versus the U.S. dollar.

The past three weeks or so has seen a divergence of around 7 percent in that rate of exchange, which basically means the Chinese mills have to come up with more than 7 percent of CNY to fund the same amount of USD to purchase raw wool in just four weeks. The rates have largely been considered to have been pegged against the USD, but this latest break away is far too great a magnitude to rely upon that theory anymore.

A common thought is the Chinese operators needing wool for the past month have largely relied on indent operators to secure the minimum supply required. This is mainly due the adverse forex rates CNY vs. USD and forward sellers being reticent to expose themselves to forward risk without cover. This certainly appeared to be the case again this week as the larger indent buyers consistently topped the Merino offering and were near the top on the crossbred buyer's list at auction throughout the week. Significantly, the pass in rate hit 15.6 percent this week.

It's interesting that some sellers now believe the fiber is worth an average of more than 2,000 Australian cents/kg and are not willing to sell lower. Growers also reasonably suspect there will be no immediate increase in supply, so they are prepared to hold.

Read the full report at https://www.wool.com/globalassets/start/market-intelligence/weekly-price-report/jul-2018-jun-2019/awi_weeklypricereport_2018_wk_1.pdf.

Source: Australian Wool Innovation