‘Woolly think­ing’ on wool price-ex­change rate con­nec­tion

Countryman - - WOOL - Zach Relph

Me­cardo an­a­lyst An­drew Woods says an as­sump­tion that Aus­tralian wool price and ex­change rates are neg­a­tively cor­re­lated can lead to “woolly think­ing”.

In­stead, Mr Woods said the neg­a­tive cor­re­la­tion between the com­mod­ity price and AUD-USD ex­change rate falls away over time.

In a re­port re­leased by the mar­ket an­a­lyst, Mr Woods said com­par­ing the wool price with the AUD and USD ex­change rates for one­week in­ter­vals since 2000 shows there is no down­ward link over a long pe­riod.

“A com­mon per­cep­tion is that Aus­tralian com­mod­ity prices have a strongly neg­a­tive cor­re­la­tion with the Aus­tralian dol­lar-US dol­lar ex­change rate so that when the ex­change rate moves in one di­rec­tion, com­mod­ity prices move in the other di­rec­tion,” he said.

“Like all myths, there is an el­e­ment of truth to this, although the el­e­ment is quite slim.

“The as­sump­tion that wool price and ex­change rate are neg­a­tively cor­re­lated leads to woolly think­ing such as, ‘don’t sell wool when the ex­change rate is ris­ing’.

“The world is a com­plex place where com­mod­ity prices and ex­change rates move for a whole host of rea­sons.”

Separately, the East­ern Mar­ket In­di­ca­tor closed at 1874¢/kg last week, fall­ing 96¢, the big­gest weekly drop since 2003.

It comes af­ter the bench­mark in­di­ca­tor was trad­ing at 1970¢/kg clean at Oc­to­ber 19, clos­ing 53¢ down on its pre­vi­ous week.

At Fre­man­tle, the Western Mar­ket In­di­ca­tor plum­meted 61¢ to close at 2033¢ in the wake of last week’s 76¢ drop.

Aus­tralian Wool Ex­change se­nior mar­ket an­a­lyst Lionel Plun­kett said the big price cor­rec­tions re­sulted in seller re­sis­tance.

“A heav­ily re­duced mar­ket was ev­i­dent from the out­set, and as the sale pro­gressed buyer con­fi­dence slowly eroded, push­ing prices con­tin­u­ally down,” he said. “The western re­gion did not ex­pe­ri­ence price re­duc­tions as large as the East­ern State’s mar­kets, this was mainly be­cause the Fre­man­tle mar­ket was al­ready trad­ing at lev­els be­low Syd­ney and Mel­bourne.”

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