New Zealand’s terms of trade for the second quarter of 2025 increased by 4.1% quarter-on-quarter, exceeding the anticipated 1.9% and the previous quarter’s growth of 1.9%. The price for imports decreased, which positively influenced the terms of trade.

Economic indicators showed export prices increased marginally by 0.2% quarter-on-quarter, below the expected 1.5% and lower than the prior increase of 7.1%. Conversely, import prices dropped by 3.7% quarter-on-quarter, surpassing the expected decrease of 1.5%, whereas the previous quarter showed a rise of 5.1%.

Understanding Terms Of Trade

Terms of trade measures the ratio between a country’s export and import prices, indicating the relative value of exports to imports. Improvement in terms of trade suggests that export prices are rising quicker than import prices, enhancing the purchasing power of exports and potentially boosting economic growth. Conversely, a decline in terms of trade suggests import prices are outpacing export prices, diminishing the export purchasing power and potentially hindering economic growth.

The surge in New Zealand’s terms of trade is a significant upside surprise, driven primarily by a sharp drop in import prices rather than a boom in exports. We see this as immediately supportive for the New Zealand dollar, as the country’s purchasing power on the global stage has increased unexpectedly. In the hours following the data release, the NZD/USD has already climbed over 1% to trade around the 0.62 level, breaking recent resistance.

This result complicates the outlook for the Reserve Bank of New Zealand (RBNZ), which has been focused on taming inflation. The 3.7% quarterly fall in import prices is a strong disinflationary impulse, which reduces the pressure on the RBNZ to maintain its hawkish stance. We have seen a shift in interest rate markets, with swap rates now pricing in 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, we believe buying near-term NZD call options is an effective way to position for further upside while managing risk. The improved economic outlook could see the NZD/USD test the 0.6350 level we last saw in May 2025. This strategy capitalizes on the positive momentum without exposing us to unlimited losses if the trend reverses.

The data also creates a clear divergence with Australia, whose own terms of trade have softened recently due to a 10% fall in iron ore prices over the last two months. This relative economic strength in New Zealand suggests that long NZD/AUD positions are attractive. We are looking at using currency forwards to target a move toward the 1.10 level, a high not seen since late 2024.

In the rates market, the falling import price component directly challenges the need for the RBNZ to keep the Official Cash Rate at a restrictive 5.5%. We should consider entering into pay-floating, receive-fixed interest rate swaps to position for the market pricing in earlier RBNZ rate cuts in 2026. This data point is the first significant evidence that imported deflation could do the central bank’s job for it.

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