Carry Trade Guide
A carry trade is a strategy that profits from the interest rate differential between two currencies. Traders buy a high-yielding currency and sell a low-yielding one, collecting the difference as daily swap credits.
The carry trade is one of the oldest and most widely used strategies in institutional forex. When a trader buys a currency with a high central bank rate (such as the Mexican peso or South African rand) and sells a currency with a low rate (such as the Japanese yen or Swiss franc), the broker pays the trader the overnight interest differential (swap rate) as long as the position remains open. If the differential is 5% annualised, the trader earns roughly 5% per year purely from interest, separate from any capital appreciation.
Carry trades are most profitable in stable or trending markets where the high-yielding currency does not depreciate. Major risks include sudden rate cuts by the high-yield central bank, risk-off events that drive capital into low-yield safe havens, and unexpected volatility that widens spreads and triggers stop-losses. The yen carry trade, popular from the early 2000s, unwound violently during the 2008 financial crisis when risk aversion spiked.
Swap Rates and Rollover
Forex brokers publish daily swap (rollover) rates for each pair. These rates are derived from interbank interest rate differentials and may include a broker markup. Trades held past 5:00 PM Eastern Time (the rollover point) incur the swap credit or debit. Some brokers triple swap rates on Wednesday to account for weekend settlement.
FAQs
Can I lose on a carry trade even if the exchange rate does not change?
Yes, if swap rates turn negative because the interest rate differential narrows or reverses, or if broker markups erode the expected credit.
Which currency pairs are best for carry trades?
Pairs with large interest rate differentials, such as USD/MXN, USD/TRY, USD/ZAR, and AUD/JPY, are common carry trade candidates.
Is the carry trade suitable for beginners?
Carry trades can be held for months and require patience, but the currency risk can be substantial. Beginners should understand the risks and use stop-losses.