15 September 2015

Trading Forex: What is a carry trade?

The carry trade is a strategy which sees a trader borrow in the currency of a country with a lower interest rate in order to buy the currency of a country with a higher interest rate. Trading a large interest rate differential between your long and short positions in this way generates ‘positive carry’.

​​​​​The term comes from a very popular trading strategy of the early 2000s, where investors looked to take advantage of Japan’s zero interest rate policy, trading the yen again the US dollar when US rates were above 5%. Hedge funds took on high levels of gearing to place big bets on short yen, long dollar, which was known as the yen carry trade. These positions saw a painful reversal in 2007 as the global financial crisis began. 

​Today, people often refer to ‘the carry trade’ as shorting the yen, even if it is just to take advantage of yen depreciation and has nothing to do with rates. The interest rate play has to be the main driver of returns in order for a trade to be considered a true carry trade. Before opening a carry trade, you should be as sure as you can be that prices will remain stable - a sharp adverse move in the exchange rate can easily erase any gains you have made from the interest rate differential. This trade is considered to be best executed as a long-term strategy and with a solid understanding of the economic and policy environment for each country in the currency pair. ​​​


 

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.