New Zealand’s terms of trade rose by 4.1% in the second quarter of 2025 compared to the previous quarter. This growth exceeded expectations of 1.9% and matched the last quarter’s increase. The improvement was largely due to a drop in import prices. Economic indicators revealed only a slight rise in export prices of 0.2%, which was below the expected 1.5% and significantly less than the last quarter’s increase of 7.1%. On the other hand, import prices fell by 3.7%, exceeding expectations of a 1.5% decrease. In the prior quarter, import prices had increased by 5.1%.

Understanding Terms of Trade

Terms of trade measure the balance between export and import prices, showing how much exports are worth compared to imports. An improvement in terms of trade means that export prices are increasing faster than import prices, enhancing the value of exports and potentially driving economic growth. A decrease in terms of trade indicates that import prices are rising quicker than export prices, which can weaken the purchasing power of exports and slow down economic growth. The significant rise in New Zealand’s terms of trade is a pleasant surprise, mainly due to falling import prices rather than a surge in exports. This is good news for the New Zealand dollar, as it boosts the country’s purchasing power unexpectedly. After the data release, the NZD/USD jumped over 1%, reaching around 0.62 and breaking previous resistance levels. This result poses challenges for the Reserve Bank of New Zealand (RBNZ), which is focused on controlling inflation. The 3.7% decline in import prices provides a strong disinflationary effect, reducing the pressure on the RBNZ to maintain its strict policies. Interest rate markets have responded, now predicting less than a 20% chance of another rate hike this year, down from over 50% last week.

Investment Strategies and Market Impact

For currency traders, buying near-term NZD call options could be a smart move to benefit from potential gains while managing risk. Given the improved economic outlook, the NZD/USD might approach the 0.6350 level, which we last saw in May 2025. This strategy allows us to harness positive momentum without the risk of unlimited losses if the trend changes. This data highlights a clear difference compared to Australia, where terms of trade have weakened due to a 10% drop in iron ore prices over the past two months. New Zealand’s relative economic strength makes long NZD/AUD positions appealing. We are considering using currency forwards to target a rise to the 1.10 level, which hasn’t been reached since late 2024. In the rates market, the decline in import prices challenges the need for the RBNZ to keep the Official Cash Rate at a high 5.5%. We may look into entering pay-floating, receive-fixed interest rate swaps to align with market expectations for earlier RBNZ rate cuts in 2026. This data may indicate that imported deflation could help the central bank achieve its goals. Create your live VT Markets account and start trading now.

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