Terms of trade is an international measure which looks at the value of exports and imports to an economy. If a country makes more on exports than it spends on imports, then it will have strong terms of trade. If terms of trade weaken, this means that the economy is spending more in imports than it is making on exports. On the foreign exchange market this means that more money is flowing out of the currency than into it. We mentioned terms of trade in our previous post as one of the reasons we expect the Australian Dollar to finish 2015 below US 70cents

Australian terms of trade have recently fallen to their lowest level since before the GFC in 2006. One of the main reasons is falling resource prices, as well as reduced demand from China for Australian exports. To put things in perspective, it is estimated that China represents over 57% of global demand for iron ore, and over 30% of global demand for copper ore. The Australian export price of Iron ore has fallen almost 25% in the past year. It is little wonder that Tourism has replaced Iron ore as our largest export.