THE softened Australian dollar (AUD) is acting as a saving grace for wool buyers as record breaking prices fail to reduce demand for the fibre in the price-sensitive Chinese market.
A current price disparity between the AUD and US dollar (USD) is working in favour of the market, providing high prices for Australian woolgrowers at 1434c/kg clean last week, but a digestible 1079 c/kg in USD terms for buyers.
The USD, which is the main trading currency of Australian wool buyers, climbed 0.80pc higher against the AUD last week to close at 75.22c on Thursday.
While the current value for the Eastern Market Indicator in USD hovers at the highest price since March 2013, the value still tracks 436c/kg below the 1515c/kg price record, according to Australian Council of Wool Exporters and Processors (ACWEP).
It is a similar story in Western Australia's Western Market Indicator (WMI) which sits 380c/kg below its highest value of 1490c/kg.
ACWEP executive director Peter Morgan said the low dollar was good for exporters as the cost of wool in Australian dollars had fallen relative to the rest of the world.
The average value of Australia's currency from 1999 to last week ranged from 48.33 to 110.55, and averaged 78.71c.
From December 2010, Australia's currency has been astonishingly high, spending most of the following two years above parity with the US dollar and averaging 90.33c since then.
"Over a period of time a lower AUD exchange rate will benefit woolgrowers - which is probably what applies now," Dr Morgan said.
The USD EMI and WMI records were set in June 2011, during a period of high commodity prices in Australia and recovering economic confidence following the global financial crisis (GFC).
Dr Morgan said the GFC sparked major changes to the wool market dynamics with the retreat of the wool industry's major credit export insurers, QBE, Coface and Atradius, which eliminated most of the Italian market. China buyers operate on letters of credit and were not vulnerable to changes in credit insurance.
The post-GFC economic uncertainty sparked the start of cautious "hand-to-mouth" buying by China mills.
"People can keep their hands in their pockets for so long until eventually they need to start buying and by 2011, that bottled-up demand displayed itself," he said.
Dr Morgan said the medium-term outlook was for the US to lift interest rates which would increase the USD and soften the exchange rate.
"This will mean wool should become cheaper in US currency," he said.
"The 'Trump effect' is an unknown factor on global financial confidence.
"If he 'makes America great again' it will be a positive because wool responds to financial confidence."
Annabelle Beale
National Sheep & Wool Writer for Fairfax Agricultural Media
National Sheep & Wool Writer for Fairfax Agricultural Media
