Carry Trade come back
How Currency Carry Trading Works
When it comes to currency trading, a carry trade is one where a trader borrows one currency (for instance the USD),
using it to buy another currency (such as the JPY). While the trader pays a low interest rate on the borrowed/sold currency,
they simultaneously collect higher interest rates on the currency that they bought. The interest rate differential
between the two currencies is the profit. Carry trading gives currency traders an alternative to “buying low and selling high”
a tough thing to do on a day to day basis. Most forex carry trading involves currency pairs such as the NZD/JPY and AUD/JPY due to the
high-interest rate spreads involved.
Pros and Cons of Currency Carry Trading
carry trading carries significant risk, specifically due to the uncertainty in exchange rates.
The high levels of leverage utilised in carry trades mean that even small movements in exchange rates could result in large losses
if a trader fails to hedge their position appropriately.
Due to these reasons, carry trading is only a good option for traders with a high-risk appetite.
In any case, it should never be the main driver of your trades, but an additional aspect that gives you an advantage over the financial markets.
Risk Management in Carry Trading
Without adequate risk management, a trader’s account can be wiped out by an unexpected, brutal turn.
The best time to enter carry trades is when fundamentals and market sentiment support them.
They are best entered at times of positive market sentiment when investors are in a buying mood.
What is the Yen carry trade?
The Yen carry trade, in which traders bought the U.S. dollar for its high yield while selling the almost yield-less Yen,
was last in fashion in the earlier part of the 21st century, basically from 2004 to 2008. After the 2008 financial crisis U.S.
interest rates dropped enough that the so-called Yen carry trade was no longer profitable.
However, the Yen remains at zero interest rates and it is possible to participate in a Yen carry trade by buying
dollar and sell yen
carry trade comeback
Conclusion
Carry trading is a strategy that has the potential to be highly profitable over the long term if correctly managed.
The steady stream of income it can provide can cushion you from the negative effects of exchange rate movements.
but if you ride on carry trade trend you can make money.