Insights 
VT 
New Zealand’s terms of trade index for Q1 2025 rose by 1.9% quarter-on-quarter, but it fell short of the expected 3.6%. This is a decline from the prior quarter’s increase of 3.1%. Year-on-year, the terms of trade surged by 17%.
Export prices increased by 7.1%, driven mainly by dairy prices, surpassing the forecast of 3.7% and the previous quarter’s 3.2%. Import prices climbed 5.1%, which was higher than the expected 1.3% and prior 0.1%.
Currency Impact On Trade
The Reserve Bank of New Zealand cited a 5.3% year-on-year fall in the trade-weighted NZD index. The New Zealand dollar weakened against most major currencies, influencing the rise in both import and export prices.
Export volumes increased by 4.6%, while import volumes decreased by 2.4% from the previous quarter. The terms of trade measure the ratio of export prices to import prices, indicating the purchasing power of a country’s exports. An improving terms of trade suggests rising export prices relative to import prices, boosting purchasing power and potentially economic growth. Conversely, a deteriorating terms of trade can reduce export purchasing power, negatively affecting economic growth.
With export prices rising more sharply than expected and outpacing import prices, the country has still managed a positive shift in terms of trade this quarter. However, given that the overall index gain was less than anticipated, the market reaction may be more restrained than it would have been if expectations had been met. The 1.9% quarterly increase, while pointing to some strength, undershoots what was assumed by a wide margin—nearly half—suggesting some fragility beneath the surface.
Our reading of the data shows that a weaker currency has underpinned much of this movement. The trade-weighted decline in the local dollar seems to have supported both exports and imports. Exporters benefited through improved competitiveness abroad, while importers faced higher costs due to a lower currency value. This dual effect sent both price indices higher, yet the spread between export and import prices still expanded, preserving the general directional improvement in terms of trade—just not to the degree many had projected.
Now, volumes offer a slightly different narrative. Export volumes rose steadily, which supports the headline numbers on pricing by volume. Meanwhile, the drop in import volumes indicates what may be early signals of demand softening or, perhaps more likely, delayed purchases due to higher costs. When we consider that both price and volume of exports rose, it’s fair to say exporters were on firmer ground this quarter. For derivative positioning, that may suggest leaning into relative export strength, at least in the short term, especially for sectors with strong dairy exposure.
Risk Management And Opportunity
At the same time, this inflation in import costs could lead to secondary pressures elsewhere. With input prices seemingly on an upward swing, there’s a new layer of risk to manage. Particularly if further depreciation of the local currency is expected—and that seems plausible, given the central bank’s reference to a year-long downward trend—then hedging strategies may demand more active calibration.
The gap between actual data and forecasts shouldn’t be ignored either. Forecast risk is clearly rising, and when we see mismatches of this scale, confidence around future economic data may erode slightly, spurring higher volatility around releases. Translating that into market terms, short-term mispricing could become more common, creating windows of opportunity—but only for those operating with well-grounded assumptions.
For those of us observing commodity exposures, especially in agriculture, the strong export pricing points to further upside, assuming demand from key international partners holds. However, as import costs mount and margin pressures feed through, dual exposure businesses—those relying on imported inputs for export production—might find themselves squeezed. Being ahead of that curve through appropriate risk transfer tools could make the difference in outcome consistency.
It also bears noting that real purchasing power remains higher on net, which may feed into domestic demand resilience—though any strength in consumer activity will also depend on how much of those higher export revenues actually flow through to wages or business investment. That’s something to keep an eye on.
The discrepancy between volume and price gains—in particular, higher values against flat or declining quantities in trade—can sometimes indicate a point where price outpaces real economic engagement. That warrants caution. Trade setups that overly rely on price direction without regard to volume shifts may misfire if underlying real activity turns.
We view this release not as a reason to abandon cautious posture, but as a reminder to refine how exposures align with real economic shifts rather than nominal headlines. Where models are overreliant on forecasted relationships, we’d advise re-testing under more volatile baseline assumptions. Markets are adjusting to wider uncertainty bands, and we ought to do the same.
