📦 Terms of Trade — When Export Prices Decide Currency Power
💡 The Lesson
Two countries can export the same volume of goods —
but the one selling at better prices wins.
That price advantage is called Terms of Trade, and it quietly shapes long-term currency strength.
Better prices = more income for the same effort → stronger currency.
Worse prices = working harder for less → weaker currency.
📊 What Are Terms of Trade?
Terms of Trade (ToT) measure the ratio between:
Export prices ÷ Import prices
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Improving ToT → exports become more valuable → more foreign income → stronger currency
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Deteriorating ToT → imports cost more than exports earn → weaker currency
🏦 Why It Matters for Forex
Improving terms of trade mean:
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Higher national income
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Stronger trade balance
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Better fiscal position
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Less need for foreign borrowing
All of this supports the currency — especially over the medium to long term.
📈 Examples:
🇦🇺 Australia
When iron ore prices surge while import costs stay stable:
→ Export revenue jumps
→ Trade surplus expands
→ AUD strengthens
🇯🇵 Japan
If energy prices spike (Japan imports most energy):
→ Import costs rise
→ Terms of trade worsen
→ JPY weakens
🇨🇭 Switzerland
High-value exports (pharma, precision goods):
→ Strong pricing power
→ Stable terms of trade
→ CHF resilience
⚙️ Pro Tip — Watch Export Composition
Countries exporting commodities have volatile terms of trade.
Countries exporting high-value manufactured goods or services have more stable terms of trade.
That’s why:
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AUD, NZD, CAD swing hard with cycles
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CHF and EUR are more structurally stable
📉 When Terms of Trade Deteriorate:
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Trade deficits widen
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Currency weakens
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Living costs rise
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Central banks face policy pressure
📈 When Terms of Trade Improve:
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Currency appreciates
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Purchasing power increases
-
Economic stability improves
🚀 Takeaway
Terms of trade measure pricing power.
Currencies of nations that sell expensive goods and buy cheap ones win over time.
Those forced to sell cheap and buy expensive always struggle.
In forex, price matters — not just volume.
📢 Join my MQL5 channel for more forex fundamentals and real-world trading insights:
👉 https://www.mql5.com/en/channels/issam_kassas
