New Zealand’s terms of trade index for Q1 2025 increased by 1.9% compared to the previous quarter, but this was below the expected 3.6%. The index also declined from a previous quarter’s gain of 3.1%. However, year-on-year, it showed a strong increase of 17%. Export prices rose by 7.1%, driven mostly by higher dairy prices. This surpassed the forecast of 3.7% and last quarter’s 3.2%. Import prices also went up by 5.1%, well above the expected 1.3% and last quarter’s 0.1%. The Reserve Bank of New Zealand reported a 5.3% year-on-year decline in the trade-weighted NZD index. The New Zealand dollar weakened against major currencies, affecting both import and export prices. Export volumes grew by 4.6%, while import volumes fell by 2.4% compared to the last quarter. The terms of trade measure the ratio of export prices to import prices. An improving terms of trade suggests that export prices are rising compared to import prices, which can enhance purchasing power and support economic growth. On the flip side, a declining terms of trade can limit export purchasing power and hinder economic growth. Despite the lower-than-expected overall increase in the terms of trade, stronger-than-anticipated export prices relative to import prices resulted in a positive change this quarter. The 1.9% rise indicates some strength, but it is significantly below the expectations, highlighting potential fragility. Our analysis indicates that a weaker currency has largely influenced this situation. The decline in the local dollar has increased both exports and imports. Exporters gained better competitiveness in international markets, while importers faced higher costs due to the weaker currency. This situation pushed both price indices higher, yet the gap between export and import prices grew, reflecting an overall improvement in the terms of trade—though not to the extent that had been hoped. Looking at volumes tells a different story. Export volumes increased steadily, supporting price growth. However, the decline in import volumes may signal demand softening or, more likely, postponed purchases due to rising costs. With both export prices and volumes increasing, it appears that exporters were better positioned this quarter. This suggests a focus on relative export strength, especially for sectors heavily involved in dairy. However, growing import costs could create additional pressures elsewhere. Rising input prices introduce new risks to manage. If the local currency continues to depreciate—a possibility mentioned by the central bank due to a year-long downward trend—then businesses may need to adjust their hedging strategies more actively. The gap between actual data and forecasts is significant and shouldn’t be overlooked. Rising forecast risk can erode confidence in future economic data, potentially increasing volatility around market releases. This misalignment could lead to short-term market mispricing, creating opportunities for those with realistic expectations. For those tracking commodity exposure, especially in agriculture, strong export prices indicate potential for more gains if demand from key international partners remains steady. However, rising import costs and margin pressures may squeeze businesses that rely on imported inputs for export production. Being proactive with risk management could help maintain stability. It’s also important to note that real purchasing power remains relatively high, which may support domestic demand. Still, any strength in consumer spending will depend on how much of the increased export revenue translates into wages and business investments—an aspect to monitor closely. The difference between rising prices and flat or declining trade volumes can signal that prices are outpacing real economic activity. Caution is warranted here. Trade strategies that focus solely on price trends, ignoring volume changes, may falter if genuine economic activity diminishes. We view this report as a call to maintain a cautious approach. It emphasizes the need to align market exposure with real economic changes rather than just following nominal trends. If models overly depend on projected relationships, they should be re-evaluated under more volatile conditions. Markets are adapting to wider uncertainties, so we must do the same.

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