FOREX Carry Trade

on Carry Trade

Katie Lynn is chief strategist for the company "FXCM" in New York. Its book "Inside-day trading on forex market: technical and fundamental strategy of making a profit on the fluctuations of the market " (2005), written for both beginners and professionals, has received widely accepted. Cathy leads seminars on trade in the forex market throughout the United States and also wrote many articles for the "CBS MarketWatch "," Active Trader "," Futures magazine "and" SFO magazine ".

Regardless of whether you are trading in the stock, commodity or foreign exchange market, chances are you have heard about the transactions «carry trade». This strategy brings his followers to return to the 1980s, but only In recent years it has received great attention from the media. In this article we will briefly describe how the strategy «carry trade» works when it works, and when not to, and different ways in which short-and long-term traders can use this strategy.

What is the «carry trade

«Carry trade» is one of the most popular shopping strategies in the foreign exchange market. Purely mechanical, trade «carry trade» means neither more nor less than the purchase of high-yielding currencies at the expense of low-yielding currencies on the principle of "buy low - sell high."

most popular deals «carry trade» with currency pairs, such as AUD / JPY, NZD / JPY, GBP / CHF, because the interest differential rates them very high. The first step in deal-making «carry trade »is to find out which currency offers a high yield, and what low.

In June 2007, interest rates on the most liquid global currencies were as follows:

- New Zealand (NZD) 8.00%
- Australia (AUD) 6.25%
- United Kingdom (GBP) 5.50%
- United States (USD) 5.25%
- Canada (CAD) 4.25%
- Euro-zone (EUR) 4.00%
- Switzerland (CHF) 2.25%
- Japan (JPY) 0.50%

Looking at these interest rates, just to see what countries offer the largest and smallest returns. See current interest rates are always available at sites forex brokers or respective central banks. Given the fact that New Zealand and Australia have the highest yield in this list, in While Japan has the lowest, it is no wonder why couples NZD / JPY and AUD / JPY are the most favorite in the transactions «carry trade ». Since currencies are traded in pairs, then all that an investor should to do to apply this strategy - this is to make a purchase on pair NZD / JPY or AUD / JPY to its trading platform.

Low Japanese yen is a sign that its by traders and earn in the stock and commodity markets. For the last few years, investors in other markets have begun to apply their own version of «carry trade», selling yen and buying, for example, American and Chinese stocks. This has created a huge market speculative bubble, as well as a strong correlation between trades «carry trade »and stock markets.

source of profit

One of the cornerstones of the strategy - it is an opportunity earn interest. Transaction «carry trade» revenue collected each day with its tripling from Wednesday to Thursday (compensating for the weekend). In approximate way, the daily rate is calculated as follows way:
(The interest rate on the purchased currency - interest rate on the currency sold) * position size / number of days in a year

For a lot of currency pair NZD / JPY, which is $ 100,000, we calculate the percentage as follows:

(0.08 - 0.005) * 100.000/365 = $ 20 per day

It is important to understand that this amount can be earned only by those Traders who hold long positions in the pair NZD / JPY. For those who has a short position, this percentage will be deducted each day.

popularity strategy «carry trade»

From January 2000 to May 2007, the currency pair AUD / JPY has provided average annual yield of 5.14%. For most people, this profitability seem insignificant, but in a market where credit arm reaches 200:1, even if you use the 5 - and 10-times leverage, you can get extremely high returns. Investors earn this profit, even if the currency pair exchange rate will not increase nor a penny. However, Considering how many people are fond of transactions «carry trade», currency rate remains almost never sordid. Over the past 6.5 years, currency Course AUD / USD has increased by 83%, providing nearly 100% yield long positions in AUD / JPY. If you use the lever at least 2:1, it is will be 200%.

pros and cons

Unfortunately, the strategy of «carry trade» is not easier to buy high-yield currencies by selling a currency with low income. Not difficult to understand that this strategy is disadvantageous, as soon as exchange rate reduced the value of the average annual yield. At the use of credit leverage, losses may be even more significant. So when the deal «carry trade» are not like necessary, elimination of positions may be devastating. In connection with the it is important to understand when the transaction «carry trade» work, and when not.

When «carry trade» works:

Central Bank increases rates
Strategy «carry trade» works when the central banks or increase interest rates or are planning to increase. Today money from one country to another can be moved by simply clicking mice, and large investors, do not hesitate to move them in finding no only high, do not also increasing profitability. The attractiveness of deals «carry trade» is not only profitability, but also and an increase in market capitalization. When a central bank raises interest rates, world markets see it and usually have many people wishing to enter same deal «carry trade», causing an increase in the exchange rate. Therefore, it is important to try to enter the market at the beginning of the cycle rate increases, rather than at the end.

Low volatility
Transactions «carry trade» also work well in low volatility, because traders are more willing to take risks. The main objective of the strategy «carry trade» - receipt of interest, so any capital gain is just a bonus. In this regard, most of the participants «carry trade», especially the large hedge funds, that deal with large sums would be happy if the exchange rate not moved either to the penny, because it would still earn interest, enhanced credit arm. While the exchange rate is not reduced, participants in these operations will essentially receive a constant income. Also, traders are more comfortable taking risks in low volatility. Has become a tradition to fund these more risky trades short positions in yen.

When «carry trade» is not working:

Central Bank lowers interest rates
Yield deals «carry trade» is in question when countries offering higher interest rates begin to reduce them. The initial change of monetary policy tends to make major change in the trend of exchange rates. To deal «carry trade »were profitable, the rate or currency pair should remain unchanged or increase. When there is a reduction in interest rates, foreign investors are willing to buy mene given currency and more willing to seek more lucrative opportunities. When it occurs, the demand for helix is ??weakened, and its starting to sell. Depreciation of the currency pair could easily wipe out any income from percent.

central bank intervenes
Strategy «carry trade» also fail if the central bank will intervene in the foreign exchange market to prevent or over-strengthening or weakening of the currency. For Countries whose economies are highly dependent on exports, too a strong national currency could cause significant damage, while currency depreciation on the contrary may be affected very positively. It particularly pronounced for the financing transactions «carry trade». Many foreign companies complain that the weak yen makes their products less competitive in the global market. They occasionally ask their politicians to pressure the Japanese to those either raised interest rates or intervention had to prevent further decline of the yen. The same can be stated in relation to the intervention of the Reserve Bank of New Zealand to weaken the exchange rate New Zealand dollar.

Cart «carry trade»

Given all the "pros" and "against" strategy «carry trade», better total trade for this strategy through a basket of currencies. At any time time, a central bank may keep interest rates unchanged, while the other may increase or reduce them. With the basket, which consists of the three most profitable, and three most low-income rates, any currency pair is only part of the overall portfolio. Therefore, even if the elimination of positions in the same currency pair, losses were offset by other currency pairs. That is, in fact, prefer to trade for this strategy investment banks and hedge funds. This strategy can be more difficult for private traders, because forming the basket naturally requires more commercial capital, not this can be done by reducing the size of positions. The key aspect of the formation of the basket is a timely change account based on the curve of interest rates and monetary policy central banks.


«Carry trade» is a long-term strategy, which is more suitable for investors, rather than short-term traders, because Investors will be enough to see a couple of forex quotes once a week, not several times a day. True members «carry trade », including the leading banks on Wall Street will keep its position for many months if not years. The cornerstone of the strategy «Carry trade» is that you get the profit while you wait.

Partly because of the demand for trade «carry trade», a tendency to foreign exchange market are strong and focused. It is also important for short-term Traders, because of currency pairs, where the interest differential rates is very significant, can be much more profitable to look for opportunities for trade in the direction of «carry trade», rather than try catch correction. For example, if someone holds a short position, it every day has to pay a growing share. Still, for short-term traders better regarded as an additional percentage Plus, because it helps improve the overall transaction value, while with payment of interest affects her. For intra-day trading, this percentage does not matter, but for three, four or five days of the transaction, direction «carry trade» may already be a meaningful factor.

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