The default narrative around the Iran conflict and the oil spike that has followed it is that it is bad news, full stop. Higher energy costs feed into inflation, dent consumer spending, and put pressure on central banks to either hold tight or cut rates to cushion the hit to growth. Most of the commentary pouring out of US and European research desks is running along those lines, and most Australian investors reading that offshore commentary have quietly applied it to Australia as well.
Australia sits in a different position, and retail investors here are not fully alive to how different. For an economy like ours, the same shock that looks like a headwind elsewhere is actually a tailwind. That changes what the RBA is likely to do from here, it changes which parts of the Australian market stand to benefit and which stand to struggle, and in our view, the pricing of that difference is still catching up.
Published 24 April 2026. Analysis based on institutional research available at time of writing.
What Terms of Trade Actually Means
Terms of trade is a simple idea dressed up in fancy language. It is the ratio of the prices we receive for the stuff we export to the prices we pay for the stuff we import. When export prices rise faster than import prices, terms of trade improve. When they fall faster, terms of trade deteriorate.
For Australia, the exports that matter most are iron ore, LNG, coal, and a handful of agricultural and metals commodities. The imports that matter most are refined fuels, machinery, and consumer goods. So when a geopolitical shock sends energy prices higher, two things happen at the same time. Petrol at the bowser goes up, which is what every Australian feels directly. Less visibly, the prices foreign buyers are willing to pay for Australian LNG and coal also go up. These markets have historically moved with oil, and iron ore tends to hold up because these shocks are rarely accompanied by a genuine Chinese growth collapse.
Net it out, and Australia is on average a winner from this kind of shock. We pay a bit more at the bowser, but the country earns a lot more for every boatload of LNG and iron ore leaving the port. National income rises. The current account improves. That is not intuitive if you have spent the last six weeks watching the local fuel price climb, but the macro data bears it out.
The Small Commodity Currencies Have Split Into Two Tracks
Across the small commodity-currency economies of the developed world, the oil shock has split the group cleanly. Australia, Canada, and Norway have all had positive terms of trade moves since the conflict began in late February. Norway’s move has been the biggest by some distance, reflecting how much of its export basket is energy. New Zealand, Sweden, and Switzerland have all had negative moves because they are net importers of the commodities in question.
The direction of the rates response splits the group the same way. For the exporters, a positive terms of trade shock raises rates, because the extra income flowing into the economy widens the output gap, pushes growth higher, and adds to inflation, all of which force central banks toward tighter policy. For the importers, the same shock works in reverse. Their income falls, their current account deteriorates, and while import inflation rises, the dominant effect on their central banks is the growth hit rather than an inflation response.
This is the single most important point in this piece for Australian investors. Our terms of trade just improved, and the rates beta to that is positive. When Australia’s terms of trade improve in a sizeable way, Australian interest rates tend to rise with them. That pattern is there in the historical data, and the current shock is large enough to activate it.
Why The Starting Point Matters So Much This Time
The second layer is that central banks do not respond to shocks in a vacuum. They respond in the context of where inflation and the labour market already sit when the shock arrives. A supply shock that hits an economy with benign inflation and plenty of labour market slack can usually be looked through. A supply shock that hits an economy already running above the inflation target, with an unemployment rate sitting well below the decade average, cannot be looked through, because the risk of second-round effects is too high.
Second-round effects is another piece of central bank jargon worth translating. The first-round effect of an oil shock is the direct impact on the CPI from higher petrol, energy, and freight costs. Those are mechanical and fade as the price level resets. The second round is what happens next. If workers, seeing higher prices across the board, negotiate higher wages, and businesses, seeing higher wages, pass those costs on to their customers, a one-off price shock can embed into ongoing inflation. The tighter the labour market at the onset, the more bargaining power workers carry, and the higher the odds of that embedding happening.
Australia enters this shock with underlying inflation still above the RBA’s 2 to 3 percent band, and with an unemployment rate that has been tighter than its long-run average. That is a textbook environment where a central bank cannot afford to look through. Contrast that with New Zealand, which has a visibly weaker labour market and a negative output gap to absorb the hit. Or with Sweden, where inflation was running below target before the shock arrived. Both can afford to be more patient. Australia cannot.
Where The RBA Goes From Here
The case is building for two further RBA hikes, with May and June both genuinely live. Consensus is still drifting toward a view that the RBA holds after one more move at most, but that pricing leans heavily on offshore narratives about easing central banks and underweights what is happening in the domestic data. If the next monthly CPI print comes in anywhere near where the current trajectory suggests, and the terms of trade tailwind does what it has done in past episodes, the pricing of the forward curve will have to reprice higher.
The curve implications matter too. A yield curve is just the chart of government bond yields plotted out by maturity, from three months at the short end all the way out to thirty years at the long end. When a central bank is hiking at the short end, short-dated bond yields rise faster than long-dated yields, because the long end is pricing the full cycle including the eventual cuts. That is what analysts mean when they talk about a flattening curve. Bonds maturing in one to three years sell off harder than bonds maturing in ten or twenty. For retail investors who hold bond funds or defined-term income products, it is worth checking the duration profile of what you own, because the short and medium end of the curve is where the near-term damage sits if this scenario plays out.
What This Means For An Australian Portfolio
The trade implications run across several parts of the local market, and we think the setup warrants real positioning changes rather than just a mental note.
Miners are the clearest beneficiaries. BHP, Rio Tinto, Fortescue, and Woodside all earn in the commodities that are now trading better, and the names with greater leverage to iron ore and LNG get a direct earnings lift from the price moves. This is a fundamentals tailwind that sits on top of whatever valuation debate you were already having on any single name. If you are underweight the resource sector relative to your long-run positioning, the current shock is the sort of catalyst that warrants a rethink.
Banks are a more mixed read. Higher cash rates widen net interest margins in the short term because variable-rate lending reprices faster than deposit rates, which is why the big four tend to rally into the front half of a hiking cycle. That is the first-order effect and it is a positive. But further out, higher mortgage rates squeeze household serviceability, slow lending growth, and lift the risk of credit losses at the margin. The second-order effect depends entirely on how far the hiking cycle has to go before something breaks. The near-term trade is supportive, but this is not a set-and-forget position.
Bond proxies are where we would be cautious. Australian REITs, listed infrastructure, utilities, and long-duration growth names all benefited materially from the back half of 2024 and through 2025 as rate expectations drifted lower. A sustained repricing of the front end of the curve higher pulls the rug on that trade. Anyone sitting on oversized positions in the darling names of 2024 and 2025 should be running the scenario where two-year yields are fifty basis points higher six months from now and asking what the damage looks like.
The Australian dollar should get support from the same terms of trade dynamic that drives the rates call, and that is a secondary factor worth noting. A stronger AUD is a headwind to the USD earnings of companies like CSL, ResMed, and James Hardie. It is a tailwind for domestic retailers who import inventory and for anyone carrying USD-denominated debt. Like banks, the AUD read is two-sided and depends on which end of the portfolio you are looking at.
The Broader Point
The story dominating offshore financial news right now is that the Iran conflict and the energy shock are net negatives for the global economy, and that most central banks should respond by easing or by holding while they wait it out. That may well be true for the US, the UK, and parts of Europe. It is not true for Australia. We are running a domestic inflation problem that had barely cleared the worst of it before the shock hit, and the shock itself is adding to domestic income rather than taking it away. That is the precise combination that forces a central bank to lean in rather than look through.
Investors positioned for a dovish Australian rates narrative because they have been reading US commentary are positioned for the wrong country. The domestic setup genuinely is different, and the market is still catching up. The trade is to lean into that divergence before the pricing closes it.
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