‘Woolly thinking’ on wool price-exchange rate connection

- 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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