The ratio between a country's export prices and import prices. Improving terms of trade (export prices rising relative to import prices) tend to strengthen a currency, while deteriorating terms of trade weaken it.
What Terms of Trade Measures
Terms of trade (TOT) is calculated as the ratio of export prices to import prices, multiplied by 100. A reading above 100 means export prices are rising faster than import prices (improving terms), while below 100 means the opposite (deteriorating terms). The indicator captures how much a country earns from exports relative to what it pays for imports.
Impact on Currencies
Improving terms of trade are generally positive for a currency. When a country's exports become more valuable relative to its imports, more foreign currency flows in per unit exported, improving the Trade Balance and the Current Account.
Commodity-exporting countries are particularly sensitive to terms of trade changes. When commodity prices rise, exporters like Australia, Canada, and New Zealand see their terms of trade improve sharply, supporting the Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD). Oil price changes significantly affect the terms of trade for both exporters and importers.
Forex Analysis
Traders monitor commodity prices as a proxy for terms of trade changes in commodity-exporting nations. Terms of trade data itself is released with a lag, but commodity price movements provide a real-time estimate.
Related Terms
Trade Balance
The difference between a country's exports and imports of goods and services. A trade surplus (exports exceed imports) is generally positive for a currency, while a trade deficit (imports exceed exports) can weigh on it.
Current Account
A component of the balance of payments that records a country's transactions with the rest of the world, including trade in goods and services, investment income, and transfers. Persistent current account deficits can pressure a currency lower.
Exchange Rate
The price of one currency expressed in terms of another currency. EUR/USD at 1.0850 means 1 euro equals 1.0850 US dollars.
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