Australia’s Q2 2025 terms of trade data reveal a decrease in both export and import prices. The Import Price Index declined by 0.8% quarter-on-quarter, with a forecasted drop of 0.5% and a previous decline of 3.3%.
The Export Price Index fell by 4.5% quarter-on-quarter, surpassing the expected decrease of 3.0% and contrasting with the prior increase of 2.1%. The poor performance in trade stands in contrast to better-than-expected retail sales for June 2025, which rose by 1.2% month-on-month against an expectation of 0.4%.
Impact Of Terms Of Trade
Terms of trade encapsulate the price ratio of a country’s exports to imports, influencing economic health. A favourable shift implies export prices rise faster than imports, potentially boosting purchasing power and economic growth. Conversely, a downturn suggests import prices outpace exports, potentially diminishing purchasing power and impacting growth adversely.
A deterioration in terms of trade can be concerning, as it indicates that the country’s exports are becoming less valuable relative to its imports, which might affect overall economic performance.
Today, on July 31, 2025, we are seeing a significant split in Australia’s economic story. The sharp 4.5% fall in export prices, far worse than anticipated, points to a deteriorating trade balance. This has been driven by a slide in key commodity prices, with recent statistics showing iron ore, a top export, falling over 15% in the second quarter.
Economic Outlook For Traders
This weakness in the external sector directly contrasts with the surprising strength of the Australian consumer. June’s retail sales surge of 1.2% crushed expectations and indicates a resilient domestic economy. This creates a puzzle for the market, pitting weak national income from trade against strong domestic spending.
The Reserve Bank of Australia’s recent stance adds another layer to this outlook. Following the recent Q2 CPI data, which came in below expectations at 3.8%, Deputy Governor Hauser’s relief suggests the central bank is less pressured to raise rates from the current 4.35%. This inflation reading gives them room to focus on the weakening external picture.
For traders of currency derivatives, this mixed picture suggests the Australian dollar may face headwinds. We believe the negative terms of trade, a factor we saw drag on the currency during the 2013-2014 commodity downturn, will likely outweigh the strong retail figures. Options strategies that bet on a lower or more volatile AUD/USD exchange rate could be appropriate.
In the interest rate market, this situation implies that expectations for further RBA rate hikes may be too aggressive. The welcome inflation data, combined with the poor trade numbers, reduces the case for a more hawkish policy. Traders could look at buying three-year bond futures, positioning for the market to price out future rate hikes.
For equity derivatives, the data suggests a potential pair trade on the ASX 200 index. We expect mining and resource company stocks to underperform due to the slump in export prices. Conversely, consumer discretionary and retail stocks could continue to do well, making a strategy of going short the materials sector while going long the retail sector a logical response.
