New Zealand's terms of trade down 3.7% in Q3

New Zealand's terms of trade, the ratio of export to import prices, fell by 3.7% in the September quarter. This was a slightly larger decline than the forecast of -2%. The index is now almost 8% below the peak reached in mid- legs of the terms of trade were affected by the weaker New Zealand dollar, which was down 8.4% on a trade-weighted basis. 

In the case of exports, the lower NZD helped to offset the impact of lower world prices for some key commodities, particularly dairy products, which were basically flat in NZD terms. Other export commodities such as meat, wool and logs benefited from the lower exchange rate, recording price increases in the 8-10% range. Overall, export prices were up by 3.4%.

Meanwhile, import prices rose by 7.3%, largely reflecting the lower exchange rate. However, there were a few categories where there were also gains in international prices - particularly petroleum (up 13.4%), which accounts for about a tenth of New Zealand's imports. This was the main source of the surprise relative to the forecast, although this is unlikely to be an ongoing concern, as world oil prices have subsequently fallen again.

The terms of trade report also provides a breakdown of trade volumes. Export volumes rose 3.7%, led by an 11% rise in dairy products. Dairy export volumes were temporarily depressed over the first half of this year as a result of a short-lived drought. Manufactured goods also had a strong quarter, with volumes up 6.1% to a new record high. Import volumes rose by 0.7%.

There was no market reaction to this release. While the result was a bit softer than market forecasts, the terms of trade is typically a low-priority release for financial markets, given that it only reflects developments in commodity prices (especially dairy) with a sizeable lag.