We use cookies that are necessary for this site to work. With your permission we would also use analytics and advertising cookies to understand how the site is used and to measure our advertising. Cookie Policy
A carry trade is a strategy where a trader borrows (sells) a currency with a low interest rate and uses the funds to buy a currency with a higher interest rate, profiting from the interest rate differential. The daily swap credit is the carry. Carry trades work best in stable, low-volatility environments and can be highly profitable over months, but they carry significant risk if the high-yield currency depreciates sharply.
Suppose the Australian dollar’s interest rate is 4% and the Japanese yen’s is 0.5%. You buy AUD/JPY, and each night you hold the position you may receive a swap credit reflecting the differential. The swap you actually receive is set by the broker’s swap rates, which can be lower than the rate differential or even negative. And if the yen suddenly strengthens, the capital loss can wipe out months of carry.
