What is the carry trade and how can traders profit from it?
Over the past few years, the carry trade has been a major talking point in the financial markets. It is often mentioned in the news because a large number of investors use it as a trading strategy. The strategy is based on the economic theory of supply and demand since funds tend to flow into countries that have a higher return on investments. Simply put a carry trade is where a trader borrows money in a low interest currency (e.g. the Japanese Yen) and buys assets in a high-yielding currency (e.g. the Australian Dollar, NZ Dollar, or the Brazilian Real). For example, if a trader was to sell the JPY and use the funds to buy the New Zealand dollar (NZD) the interest differential would equate to 7.75%. Interest rate for the Yen is 0.05% and interest rates in New Zealand are 8.25% (8.25% – 0.05%). Therefore if a trader invests $10,000, he or she would earn 7.75% on this carry trade per year, which is $775. With the use of leverage as provided by all foreign exchange providers, this return
