About 80% of Australian wool production is processed in China, so the exchange rate between the Australian dollar and the US dollar is the main exchange rate for this wool stream. Figure 1 compares the Eastern 19.5 MPG in Australia and US dollars from 2000 to this month. The chart shows that the 19.5 MPG follows similar cycles and trends in both currencies, with variations in the movement of the value. Overall, the two series are positively correlated, showing that the exchange rate is a secondary price-setting factor.

Figure 2 shows the distribution of week-to-week correlations between the 19.5 MPG in Australian dollars and the exchange rate of the Australian dollar against the US dollar, from 2000 to 2022. The correlation ranges from 1, 0 (where the two series move in parallel – perfectly positively correlated) to -1.0 (where the two series move in completely opposite directions – perfectly negatively correlated). The line shows the cumulative proportion of correlation as the correlation ranges from +1.0 to -1.0.

There is a bias to being negatively correlated in Figure 2, which is consistent with the common perception that Australian commodity prices and the exchange rate move in opposite directions. However, note that about 30% of the time over the 22 years between 2000 and 2022, the 19.5 MPG was positively correlated to the Australia/US dollar exchange rate to some degree. On the other hand, 19.5 MPG and the exchange rate are negatively correlated, ranging from weak to perfect correlation, 47% of the time. What Figure 2 shows is that while the price of wool is more often negatively correlated to the exchange rate, there are significant periods when this is not the case, and the situation can be reversed. Knowing when this will be the case is highly uncertain.

To illustrate the variable nature of the week-to-week relationship between the 19.5 MPG and the Australian US dollar exchange rate, Figure 3 shows the weekly variation on a daily frequency (Eastern auction days) from 2000 to 2022. There are periods when the correlation is distorted. towards strongly positive and (less) strongly negative), with most of the time the correlation swinging wildly through the range of possible correlations. The message is that, on average, exchange rate movements tend to be negatively correlated a long time ago when this is not the case, and predicting these correlation changes is certainly beyond this author.

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