Forex Carry Trade

foreign exchange

The trader will incur a loss on the interest rate differential and have to pay interest for holding the position. The currency you’re trading needs to be correlated opposite one another. This way you have a positive carry trade if you go long the high-yielding currency and go short the low-yielding currency.

exchange rate

Using stop- orders can help protect your capital from adverse market movements. Knowing your risk sizing and how much you could make or lose on a trade is important and can be done easily by using the Admiral Markets Trading Calculator. This calculator also provides the swap long and swap short charges which are essential to know to be able to find a suitable currency pair with a positive carry. There is no doubt that carry trading, while potentially lucrative, carries a fair amount of risk. This is because the best currencies for this type of trading tend to be some of the most volatile. Negative market sentiment among traders in the currency market can have a rapid and heavy effect on “carry pair” currencies.

What is a currency carry trade and how does it work?

Basically, in order for the carry trade to result in a profit, there needs to be no movement or some degree of appreciation. If you’re looking for pairs to implement into your FX carry trading strategy, then the exotics offered by your forex broker are worth a look. If the exchange rate moves against the yen, the trader will profit even more.

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The table below outlines the 4 different market scenarios interest rate expectations can impact the exchange rate. Interest rate is the payment charged by a lender to a borrower for the use of an asset or other financial instruments. Usually, the amount charged by the lender is expressed as a percentage of the principal. When talking about interest rates, the compounding effects are often taken into account, which provides a more accurate interest rate known as the effective interest rate.

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This comes from the difference in interest rates between the two currencies. The NZD/CHF exchange rate traded above the 200-day EMA for 328 consecutive days in which case you would have captured $2,764.35 just from the interest rate. However, if you held that trade for a year, then those $4 would turn into $1,593. Even if after one year the GBP/USD exchange rate would be at your break-even point you would still make money because of the interest earned. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey.

Panic sets in and traders all look to unwind their positions at the same time. For this reason, currency pairs with carry opportunities often trend strongly in the direction of the interest rate differential. Trending can take place over very long periods of time when the economic backdrop is good and the interest rate expectations are upwards. Margin is important for carry trade, because we just have to take into account the maximum movement against our position. This is why the table presents the swap size for every $100 margin. We consider it one of the basic parameters for the given strategy.

  • The difference between the long/short swap values is the rollover– or swap spread.
  • Still, carry trading carries significant risk, specifically due to the uncertainty in exchange rates.
  • Our forex comparisons and broker reviews are reader supported and we may receive payment when you click on a link to a partner site.
  • A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.
  • The carry trader might make this forecast based on a suitable combination of technical and fundamental analysis, since it will usually be for a fairly long time frame.
  • The trader would receive 2.07 EUR if trading a one standard lot position.

Another way of doing a fixed income carry trade is to buy a long-term bond in a high yielding country and sell a long-term (or short-term) fixed income instrument in a lower yielding country. This trade has foreign exchange risk, which could be hedged to end up with a pure fixed income play. Some traders have a view on currencies and prefer not to hedge any spot exposure. Therefore, the best way to carry trade in Forex is to also have a trading strategy which helps you to identify currency pairs which will trend and appreciate or depreciate over time. You can learn more about trading strategies in the ‘ Forex Trading Strategies That Work’ article.

Best Way to Trade Carry

The currency pairs with the best conditions for using the carry trading method tend to be very volatile. Nervous markets can have a fast and heavy effect on currency pairs considered to be “carry pairs.” Without proper risk management, traders can be drained by a surprising and brutal turn. Investors execute an FX carry trade by borrowing the funding currency and taking short positions in the asset currencies. The central banks of the funding currencies usually use monetary policies to lower interest rates in order to facilitate growth during times of recession. As the rates fall, investors borrow money and invest them by taking short positions.

From the above table, we can recognize that the highest net return is offered by going long NZD/CHF. The official benchmark interest rate in New Zeland is 1.75%, while the official benchmark interest rate in Switzerland is -0.75%. The second part of the carry trade strategy PDF will show you how the trade the Best Carry Trade Strategy – The $14 Trillion Tradeworks in real life. When you trade currencies, you simultaneously buy one currency and sell another currency from a different country.

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If the with the low yield has a significant difference from the currency with the high interest rate then profits can be made with the carry trade. When a carry trade is combined with leverage, then these profits can be significant. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances.

In the two-quotation system, the first currency quoted is the base currency, while the second currency is the quote currency. Interest rates are set by a country’s central bank in accordance with the mandate of that country’s monetary policy – this will differ from country to country. A trader then earns interest on a position when they are long the currency in the pair with the higher interest rate. For example, if the Australian dollar offers 4% and the Japanese Yen has interest rates set at 0%, traders could look to buy AUD/JPY to take advantage of the 4% net interest rate differential.

Optimal Conditions for FX Carry Trading

If you trade intraday, make sure you’re not using one of the brokers that charges interest continuously . If you use MetaTrader, you can easily check the swap rates by right clicking in the “Market Watch” window. The difference between the long/short swap values is the rollover– or swap spread. Figure 2 shows the massive liquidation of carry trades shortly before the Lehman Brothers collapse. This is followed by successive interest rate cuts due to the economic recession.

This tool calculates the amount of interest earned or paid on trades which are held over long periods of time, based on the differential of the interest rates in the traded pairs’ respective countries. Place your trade 24-hours a day, five days a week – from 9pm Sunday evening to 10pm Friday night on our award-winning platform. You’ll have the choice of trading 80 global FX pairs with competitive spreads. The foreign exchange, or Forex, is a decentralized marketplace for the trading of the world’s currencies. The theory behind carry trading is to borrow one asset to buy another. As long as the interest you’re charged to borrow one asset is less than the interest you’ll receive for the asset you buy, you will remain in a profitable position.


Currency values, exchange rates, and prevailing interest rates are always fluctuating, so no single currency is always best. In general, the most popular carry trades involve buying pairs with the highest interest rate spreads. True, carry traders, including the leading banks on Wall Street, will hold their positions for months at a time.


There are countless trading strategies out there but none of them can guarantee you a profit. If you want to generate stable returns in the forex market, you can take advantage of what is known as the carry trade. A change in the market can certainly negate any benefits you have gained from the positive interest rate difference. Particularly if you decide to trade in minor, or exotic currency pairs which are less common, you should note that these markets can be highly volatile, and subject to change in a very swift fashion. Both may appear attractive for a carry trade, but can be subject to intense volatility. This risk can be amplified even further if you are trading with a lot of leverage.

The carry trade is not for the very short term trader, but instead should be used as a longer term trade approach. We have seen that the carry trade offers a dual benefit to the trader in terms of being able to earn interest income and potential upside on the price appreciation as well. But do keep in mind that the carry trade does have its own inherent risks which should be minimized using sound position sizing and money management principles. For instance, the Japanese yen carry trade surpassed $1 trillion in 2007 as a result of the yen’s use as a currency for borrowing due to its nearly low-interest rates. However, as the world economy deteriorated during the 2008 financial crisis, practically all asset values fell, unraveling the yen carry trade.

  • The fact that many brokers nowadays also cater for trading with very competitive fees and low spreads also plays to your advantage if placing a carry trade, and is something that many look out for.
  • For those short the AUD/CHF, interest is paid daily, just as someone shorting a stock would pay the dividend, if applicable.
  • To trip the full benefits of the carry trade, you need to view carry trading as a buy-and-hold type of strategy.
  • If it moves too much, it could invalidate the profits you gained from the interest difference of currency pairs.
  • With central banks behind the Forex majors having slashed overnight bank rates and rollovers to all but zero, they’ve been taken out of currency carry trade consideration.

This lets you focus on the trade, knowing the other important metrics are taken care of. Central banks, such as the US Federal Reserve , the Bank of Japan , the Reserve Bank of Australia , and the Bank of England set base interest rates. An example, while not accurate at the time of writing, is the RBA might have a 6% interest rate, while the BoJ might have an interest rate set as low as 0.25%. Check out our guide if you want to understand what stop-loss orders in forex trading are. In the previous example, where we sold the Australian dollar and bought the U.S. dollar, the AUD has fallen against the US dollar. Therefore, in addition to collecting the USD 0.31 interest payment, you also benefited from the downward move in the AUD/USD exchange rate.

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