what is a carry trade in forex?

A carry trade is when you leave a trade open overnight so that you can earn the difference in interest rates between the two currencies that make up the forex pair you are trading.

For example, in South Africa the Reserve Bank has set the Repo interest rate at 7.25% and in the USA the Federal Reserve interest rate is around 4.50%, so if you carry a USD/ZAR sell trade over till the next day, your broker will pay you an interest of (7.25% - 4.5%) = 2.75%

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@tiny_ox - 1 year ago

Quoted - randolf_mercer

A carry trade is when you leave a trade open overnight so that you can earn the difference in interest rates between the two currencies that make up the forex pair you are trading.

For example, in South Africa the Reserve Bank has set the Repo interest rate at 7.25% and in the USA the Federal Reserve interest rate is around 4.50%, so if you carry a USD/ZAR sell trade over till the next day, your broker will pay you an interest of (7.25% - 4.5%) = 2.75%

Let me add to what @randolf has said. If you do not carry a trade properly you won't earn any interest, in fact you will be debited for the interest rate differential instead.

Whether you earn overnight interest on a carry trade depends on if you are buying or selling the currency pair.

In @randolf's example, USD/ZAR interest rate is 4.5% vs 7.25% so to earn interest you must sell the USD/ZAR pair and leave the trade open overnight.

If you go ahead and buy USD/ZAR overnight, you will be debited instead because you are borrowing ZAR to buy USD, meaning you are borrowing ZAR with higher interest to buy USD with lower interest.

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@yokoyi - 3 weeks ago

The Japanese Yen currency is always weak because the Bank of Japan intentionally kept their interest rates low for many years. Because of this, the Yen has not been an attractive currency to hold (because it pays low interest), rather investors borrow the Yen (because they only have to pay low interest for borrowing) and quickly use it to buy high-interest rate US bonds; this is traditionally called the Carry Trade

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@yokoyi - 3 weeks ago

Quoted - yokoyi

The Japanese Yen currency is always weak because the Bank of Japan intentionally kept their interest rates low for many years. Because of this, the Yen has not been an attractive currency to hold (because it pays low interest), rather investors borrow the Yen (because they only have to pay low interest for borrowing) and quickly use it to buy high-interest rate US bonds; this is traditionally called the Carry Trade

So technically, a carry trade is just selling a low interest rate currency on margin, and using the proceeds to buy a high interest currency; but you must keep the trade open overnight to earn the interest rate differential

EXAMPLE

BUY USD/JPY is a carry trade, because you bought USD which has around 4% interest rate reward by borrowing JPY and paying 1% interest rate only; your differential reward will be 3%

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@tony_xhan - 3 weeks ago

Quoted - yokoyi

So technically, a carry trade is just selling a low interest rate currency on margin, and using the proceeds to buy a high interest currency; but you must keep the trade open overnight to earn the interest rate differential

EXAMPLE

BUY USD/JPY is a carry trade, because you bought USD which has around 4% interest rate reward by borrowing JPY and paying 1% interest rate only; your differential reward will be 3%

In the long run it is bad for Japan because it means capital has been fleeing Japan

@yokoyi

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@sandy20 - 3 weeks ago

Quoted - tony_xhan

In the long run it is bad for Japan because it means capital has been fleeing Japan

America has been unwilling to pay higher yields on bonds so TS Scott Benett spearheaded the latest Yen intervention where Japan sold out US bonds to strengthen its currency. Its a balancing act, Japan is a very unique economy

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