Carry Trade

In general, the forex trading strategy known as the "Carry Trade" refers to an increasingly widespread forex
trading strategy that is usually implemented over longer term time frames and involves taking advantage of the interest rate differential prevailing between two currencies.

Furthermore, using such an interest rate strategy in your forex trading will make the most sense if you use a forex broker that provides particularly attractive rates on rollovers for the currency pair you are most interested in putting on a carry trade with.
Profiting From Interest Rate Differentials

Since carry traders basically look to capture the interest rate differential between two currencies, as well as hopefully some additional appreciation from favorable exchange rate movements, they need to choose their pairs wisely based on two primary criteria.

The first is the magnitude of the interest rate differential itself. The absolute value of this differential can be readily computed by subtracting the higher interest rate from the lower interest rate for each currency involved. The interest rates used will be those prevailing for Interbank deposit rates for the time period during which the carry trade will be kept on for.

The second consideration is the likelihood of appreciation of one currency versus the other. Since carry trades tend to be longer-term positions, a combination of fundamental and technical analysis is often used to arrive at this forecast.

For the best carry trade scenario, you will want to choose the highest interest rate currency that stands the best chance of appreciation against the lowest interest rate currency according to your forecast for the future exchange rate over your time frame of interest.
Carry Trade Profits and Risks

Not only do carry traders hope to capture the resulting favorable interest rate differential or "positive carry" as it is often called, but they usually also plan on benefitting from interest rate compounding effects, as well as from any currency appreciation seen.

The sum of these factors at the time the trade is closed out will determine their profit or loss on the carry trade.

In terms of risk management, the interest rate differential provides something of an initial protective buffer against losses that might accrue due to adverse exchange rate movements. Nevertheless, stop losses can be placed at strategic points that stand a reduced chance of being executed as an additional form of risk management. Learn more about the risks with carry trading.
Additional Profits or Costs of Rollovers

Rollovers of currency positions tend to be executed automatically by most online forex brokers if the position is held over the time of 5 PM Eastern Standard Time.

An automatic rollover means that the broker will automatically close out your existing forex position for value spot and roll it forward for value one additional business day in the future. Since rollover rates can vary substantially among forex brokers, make sure you choose a broker with competitive rollover rates if you intend to put on carry trades.

Generally, when forex traders have their currency positions rolled, they will get paid pips to do so if they are holding the higher interest rate currency. On the other hand, if they are holding the lower interest rate currency, they will pay pips away when their position is rolled over.
Hedged Carry Trades

Yet another type of carry trade involves hedging one long carry trade with another short carry trade using different currency pairs that are closely correlated and which results in a net interest rate benefit to the overall position.

For example, a hedged carry trader might exploit interest rate differentials between well correlated currency pairs like the following:

EUR/USD and USD /CHF

AUD/USD and NZD/USD

GBP/USD and USD/CHF

EUR/JPY and CHF/JPY

GBP/JPY and CHF/JPY

Such hedged carry trades are often highly leveraged to make them worthwhile, thus much more risky. Nevertheless, the main risk to this hedged carry trade strategy arises if the correlation between the pairs breaks down for some reason and subsequently results in losses. Remember that the correlation risk is of course not the only risk factor to consider, just one of them.
The Effect of Risk Aversion and Appetite on the Carry Trade

When risk aversion prevails among investors in the forex market and exchange rate volatility is high, the carry trade often starts to look less attractive since the riskier currencies to invest in tend to have higher interest rates.

On the other hand, when all seems well in the world and more stability has returned to the currency market, the risk appetite of investors then tends to increase and they start looking for higher returns on their money, even if it means taking more risk.
The Benefit of Compounding Interest

Another interesting element that favors the carry trade is the possibility of compounding your interest on a daily basis by rolling your carry trade positions over each day.

When the rollover spreads available for doing so are reasonably competitive, this can provide even more income for the carry trade compared with just rolling the carry trade position out for an extended period using a forex forward contract.

Read about the powerful effect compound interest has on the carry trade strategy.

Read our main article on carry trading.

See our comprehensive technical analysis section.

See our comprehensive fundamental analysis section.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.
Popular Forex Education Articles
Forex Glossary
View all 1335260265glossary

What is a Value Date?
What is Monetary Policy?
What is Liquidity Management?

Forex Strategy
View all icon strategy board

Forex Scalping
Part:1 Top 10 Forex Entry Signals
Powerful FX Strategy Range Expansion Reversal..

Broker Tips
View all Forex Broker Tips

Avoiding Forex Broker Problems
Why Open a Micro Forex Broker Account
Paper Trading Forex Using Practice or Demo...

Technical Analysis
View all icon chart

Forex Price Action - Reading the Language...
The Pin Bar One of the Most Powerful...
The Effective use of Technical Indicators

Fundamental Analysis
View all icon calculator

A Step By Step Guide To Fundamental Analysis...
How Gold Affects The Forex Market
How to use Fundamental Analysis to Profit...

Trading Psychology
View all icon green brain

Why Live and Demo Forex Trading Show...
Why Most Forex Traders Fail do you have what...
Trader Personality Types

Money Management
View all piggy money management

Five Top Money Management Tips
Managing Trading Risk With Stop Orders
Position Sizing Using the Risk Reward Ratio

Trading Plan
View all packagegamesstrategy

The Trading Business Plan and Risk Analysis
Designing Forex Trading Plan and Rules
Advantages of Having a Forex Trading Journal

Automated Trading
View all automated forex trading

The Perils of Forex Backtesting
Automating Your Forex Trading
How to Construct a Mechanical Forex Trading...

Famous Traders
View all medal

William O'Niel
Jesse Livermore
Stanley Druckenmiller

Forex Software
View all icon forex software

Forex Trading Platform Basics
Forex Charting Software
Selecting a Good Forex Platform

Forex Indicators
View all forex indicators icon

Alligator Strategy
ATR Strategy
Heiken Ashi Indicator Explained

Forex for Dummies
View all

How do we get Started?
Lesson 1
Forex Market Infographic


Popular Currency Pairs

EURUSD
GBPUSD
NZDUSD
USDCAD
USDCHF
AUDUSD
USDJPY

eur usd
Member Sentiment Bearish Bearish
long 2%
short 98%
bid 
1.30
18
ask 
1.30
21
Forex Chart powered by CMS Forex. Past performance is not indicative of future results.

Top-Rated Forex Brokers
1 Markets Sign Up Review
2 NetoTrade Sign Up Review
3 AvaTrade Sign Up Review
4 XEMarkets Sign Up Review
5 UFX Markets Review Sign Up Review
Fast Graphs Feed

Finding Value In The Materials Sector Is A Material Thing
Finding Great Value In The Energy Sector
Searching For Value And Finding It In Today’s Market - Sector By Sector

Follow us on:

Subscribe to our feed
Join us on Facebook
Follow us on Twitter

Popular Articles

Forex Scalping - Extensive Guide on How to Scalp Forex
Learn Forex Trading
Top ten tips when developing a binary options strategy

US Dollar Smashed by Fed, Bernanke; Aussie Up on Jobs, Yen on BoJ

ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is down modestly on the day, having recovered half of its losses this week following dovish saber rattling from the Federal Reserve. Price action today has been largely dictated by what began on June 19, when the Fed suggested that it could wind down is QE3 easing program by mid-2014, given the recent improvement in the US labor market. From the low on June 19 to the yearly high set on Monday, July 8, the USDOLLAR rallied by +4.74%.

The optimism surrounding the US Dollar was dispelled quickly yesterday after the Fed’s June meeting Minutes showed the policymakers remained split over the timing of when to end QE3, and then at a policy speech after the US cash equity close when Chairman Bernanke said that tapering QE3 wouldn’t mean the Fed’s accommodative policy stance would change. This is important because it highlights the distinction between “tapering” and “tightening”: the Fed has merely indicated that it will slow, not stop, its easing measures.

It is of little surprise that the other majors, berated by the US Dollar since mid-June, have made a strong comeback. In fact, since Monday’s high, the USDOLLAR is now off by -1.69%, and was down by as much as -2.19% overnight. The Australian Dollar has posted modest gains following an improved June Australian labor market report, while the Japanese Yen has garnered favor following the Bank of Japan’s policy hold earlier today.

Read more: British Pound Plummets to Lows, but is it Too Much Too Soon?

Taking a look at European credit, peripheral yields have jumped on the day while core yields have fallen; putting upward pressure on Italian- and Spanish-German spreads (typically a sign of Euro-Zone sovereign debt crisis stress). The Italian 2-year note yield has increased to 1.662% (+9.2-bps) while the Spanish 2-year note yield has increased to 2.072% (+7.3-bps). Likewise, the Italian 10-year note yield has increased to 4.476% (+3.2-bps) while the Spanish 10-year note yield has increased to 4.838% (+4.9-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:45 GMT

CHF: +1.11%

GBP: +0.85%

CAD: +0.79%

EUR:+0.75%

NZD:+0.68%

AUD:+0.57%

JPY:+0.47%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.57% (-0.84% prior 5-days)

US Dollar and Fed Policy - Perception vs. Reality

The US Dollar tumbled in overnight trade after Ben Bernanke clarified the Fed’s intentions to “taper” QE asset purchases. More of the same is expected ahead.

Talking Points

• US Dollar Tumbles as Bernanke Reins in QE “Taper” Speculation
• Buoyant Risk Appetite Points to Continued Dollar Selling Ahead

The US Dollar tumbled in overnight trade, losing as much as 1.5 percent on average against its top counterparts, as Asian markets responded to yesterday’s “dovish” commentary from Federal Reserve Chairman Ben Bernanke. The central bank chief pushed back against speculation about a near-term reduction of QE, reminding investors that the “overall thrust” of policy remains highly accommodative. Bernanke added that inflation and job growth trends signal that more Fed stimulus is needed.

Minutes from June’s FOMC policy meeting seem to illuminate the impetus behind the Fed Chairman’s tone. Officials debated including specific language about the fate of the asset purchase program in the policy statement but ultimately felt it was too difficult to “convey succinctly the desired information.” As such, much of the discussion focused on how Bernanke ought to explain the central bank’s intentions in the press conference following the sit-down, with most participants stressing that he should:

1. Make clear that any changes to the asset purchase program remained highly conditional on an ongoing assessment of the economic outlook.
2. Strike a clear distinction between “tapering” and “tightening”, stressing that there is likely to be a significant time lag between the end of QE and an increase in the benchmark lending rate.

In retrospect, those FOMC members who feared that “stating an intention to slow the pace of assetpurchases...might be misinterpreted as…the initial step toward exit from the [Fed’s] highly accommodative policy stance” proved correct.Indeed, the mass liquidation of QE-linked bets in the aftermath of June’s FOMC meeting suggests the markets interpreted the Fed’s posture as having shifted significantly toward the hawkish side of the spectrum.

With that in mind, today’s comments from Mr Bernanke represent not an about-face in the Fed’s thinking but an attempt to realign the markets’ perceptions. The reality of the Fed’s intentions has not changed, but volatility in asset prices since Bernanke spoke shows that the markets’ perception of those intentions is undergoing significant reassessment.

More of the same seems likely to ahead. European shares are on racing higher in early morning trade and S&P 500 futures are up by nearly a full percentage point as traders cheer the prospect of longer-lasting Fed support. A quiet economic calendar offers little that can derail momentum, pointing to continued US Dollar weakness ahead.

Partnership

FXDana's partnership programs give individuals and small businesses additional opportunities to make money in the forex market. Our partnership programs for institutional clients, introducing brokers, white label, money managers, and affiliate partners, can open the door to a world of new revenue streams. Partner with FXDana and take advantage of our innovative trading technology and expertise.

FXDana offers the following programs:

Institutional Clients:
We serve institutional clients across all foreign exchange markets, meeting the diverse needs of corporations, asset managers, hedge funds and broker-dealers. We are well capitalized, profitable, and we are investing in the future. As the forex markets evolve, we will continue to invest in people and technology to ensure that we remain a leader in FX trading.
Read more »

Introducing Brokers:
FXDana is Introducing Broker Program is a great opportunity for both individuals and organizations to receive compensation (commissions or rebates) for introducing their customers or contacts to the forex market by using FXDana’s impeccable trading services and products.
Read more »

White Label:
FXDana’s White Label Program is for qualified individuals and institutions that want to establish a brand name and a presence in the forex industry. As a white label partner, you will be provided with a trading platform (MT4 or OMNITRADER+) with your brand or logo as well as content for your introducing broker website. You will also enjoy our award-winning technology, no dealing desk, full service back office support, and other administrative and support functions.
Read more »

Money Managers:
FXDana’s Money Manager trading platform enables money managers to trade on behalf of investors, managing multiple investor accounts from a single interface. A money manager account can be configured to consist of one or several managed accounts, representing independent and unified trading structure that is traded only by the manager.
Read more »

Affiliate Partners:
FXDana’s Affiliate program is an easy way to partner with us and benefit from the global trading industry by monetizing your website traffic. Our program is simple, earns high and fast commissions, and is the best option for referring traffic. Our Affiliate program is most popular and works great for website owners, industry bloggers, networks, data managers, and offline advertisements. 

Yen Misses Out on Flows to Risk-Off Currencies

EUROPEAN SESSION UPDATE: Euro fails to react to a better than expected German business climate survey; PM Abe said the Japanese economy has benefitted from Forex movements…

We seem to be watching another risk-off session in today’s Forex trading, as the Franc and US Dollar are showing the biggest wins, and the three commodity currencies, CAD, NZD, and AUD, are showing the biggest losses. Equities have traded lower in both the European and Asian markets, and US futures are also pointing downwards.

However, the Yen does not seem to be showing any significant gains in today’s risk-off trading, possibly explained by a widespread rise in 10-year bond yields from many different countries, with the exception of Japanese government bonds.

There was little data in today’s European session, and a better than expected rise in the German IFO business climate survey failed to move the Euro significantly higher. Meanwhile, the Swiss 10-year bond yield rose above 1.00% for the first time since October 2011.

In Asia, Japan PM Abe further broke a taboo for Japanese officials to discuss Yen levels, as the leader said Forex movements until now have been positive for the economy. In China, further worries over a lack of liquidity and a Goldman Sachs downgrade of its Chinese growth forecast sent the Shanghai Composite index 5.30% lower and below 2000 for the first time since December.

The US Dollar is currently trading slightly below 98.00 against the Yen, and USD/JPY may again see support around 96.50. The pair may see further resistance by the 99.00 figure.

(How does a Currency War affect your FX trading? Take our free course to find out!)

Dollar Index Reaches 2-Week High as Fed View Boosts U.S. Yields

The Dollar Index rose to a two-week high as the yield differential between U.S. and Japanese government securities increased to the widest in almost two years, increasing the appeal of dollar-denominated assets.

The U.S. currency rose against all but one of its 16 major counterparts before U.S. reports tomorrow that economists said will show durable-goods orders gained and house pricesincreased as the Federal Reserve may reduce monetary stimulus. A gauge of currency volatility climbed to the highest since June 2012. Chinese stocks fell the most in four years, damping investor interest in riskier currencies. The Swedish krona slid to a seven-month low versus the dollar.

Enlarge image

Stacks of U.S. $100 bills are arranged for a photograph in New York, U.S. Photographer: Scott Eells/Bloomberg

3:15

June 20 (Bloomberg) -- Ford Motor Co. Chief Executive Officer Alan Mulally talks about Japan's currency policy, the automaker's production in Asia and growth strategy in China. He speaks with Bloomberg's Stephen Engle in Nanchang, China. (Source: Bloomberg)

4:53

June 19 (Bloomberg) -- Mitul Kotecha, the global head of foreign-exchange strategy at Credit Agricole SA in Hong Kong, talks about Japan's currency, government and central bank policies. Kotecha also discusses the prospects for Federal Reserve policy and emerging-market currencies. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg)

“Long-term yields in the U.S. have continued to jump higher over the last week,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “That’s driving some inflows and strength into the U.S. dollar. There’s been a reassessment of the whole liquidity story and what will be the impact on rates across the board.”

The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the U.S. currency against those of six trading partners, rose 0.3 percent to 82.531 at 8:57 a.m. in New York after climbing to the highest level since June 5.

Currency Levels

The dollar advanced 0.2 percent to $1.3101 per euro after appreciating to the strongest level since June 6. The U.S. currency weakened 0.4 percent to at 97.50 yen. The yen added 0.5 percent to 127.77 per euro.

JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency option premiums, rose to as high as 11.83 percent today, the most since June 1, 2012. The gauge has averaged 8.76 percent in the past year.

Sweden’s krona declined versus all 16 of its major peers as the CSI 300 Index of Chinese stocks fell the most in four years, signaling a bear market. The currency dropped 1.3 percent to 6.7550 per dollar after depreciating to the least since Nov. 21. It has tumbled 4.4 percent in the past week.

The Norwegian krone fell against the majority of its most-traded counterparts, slipping as much as 1.6 percent to 6.1539, the lowest since July 17.

Treasury Yields

Treasuries due in two years yielded 0.28 percentage point more than similar maturity Japanese sovereign debt, the biggest premium since July 2011, according to Bloomberg data.

“The fundamental picture for the dollar is clearly positive,” said Marcus Hettinger, a currency strategist at Credit Suisse Group AG in Zurich. “The expectation that the Federal Reserve may start reducing asset purchases leads to higher U.S. yields supporting the dollar.”

The Dollar Index jumped 1 percent on June 19 when Chairman Ben S. Bernanke said policy makers may begin reducing their quantitative-easing program this year and end it in mid-2014 if the economy is achieving the central bank’s objectives. The Fed purchases $85 billion of bonds each month.

Fed Bank of Dallas President Richard Fisher, one of the most vocal critics of the central bank’s quantitative easing, is due to talk about U.S. monetary policy and the economy today in London. This week will also see speeches from Bank of Atlanta President Dennis Lockhart, Bank of Richmond President Jeffrey Lacker, Bank of Cleveland President Sandra Pianalto and Bank of San Francisco President John Williams.

U.S. durable-goods orders increased 3 percent in May after rising a revised 3.5 percent the previous month, according to a Bloomberg News survey before tomorrow’s Commerce Department report. The S&P/Case-Shiller index of home values for 20 cities climbed 10.6 percent for the year ended April after a 10.9 percent gain in March that was the biggest since 2006, a separate survey showed.

U.S. Stocks Tumble as S&P 500 Extends Monthly Decline

U.S. stocks retreated, sending the Standard & Poor’s 500 Index to a nine-week low, as Chinese equities entered a bear market amid concern a cash crunch will hurt the world’s second-largest economy and speculation increased that the U.S. will begin curbing stimulus.

Enlarge image

Traders work on the floor at the New York Stock Exchange on June 21, 2013. Photographer: Timothy Clary/AFP via Getty Images

Enlarge image

The S&P 500 sank 2.1 percent last week, the most since April 19, after the Federal Reserve said it may start paring stimulus measures as soon as September if the economy improves in line with its forecasts. Photographer: Jin Lee/Bloomberg

Bank of America Corp. and Citigroup Inc. slid more than 2.8 percent as banks tumbled. Barrick Gold Corp. led gold producers lower as the precious metal traded near a 2 1/2-year low. Deere & Co. lost 3.2 percent as JPMorgan Chase & Co. recommended selling the shares. Vanguard Health Systems Inc. surged 67 percent after agreeing to be bought by Tenet Healthcare Corp. for about $1.8 billion.

The S&P 500 (SPX) fell 1.7 percent to 1,565.07 at 10:01 a.m. inNew York, the lowest level on a closing basis since April 22. The Dow Jones Industrial Average slipped 239.03 points, or 1.6 percent, to 14,560.37. Trading in S&P 500 stocks was 33 percent above the 30-day average during this time of day.

“Investors have been shaken by the concept of rising interest rates and a reduction in stimulus from the Federal Reserve, coupled with the uncertainty regarding effectively how robust the Chinese central banking system is,” Ethan Anderson, senior portfolio manager for Rehmann Financial in Grand Rapids, Michigan, said by phone. His firm manages about $1.5 billion. “We found ourselves in a headline-dependent environment, which is difficult for investors to function.”

The CSI 300 Index (SHSZ300) of China’s biggest companies tumbled 6.3 percent, the most since August 2009 and taking its decline from this year’s peak to more than 20 percent. China’s central bank said there’s a reasonable amount of liquidity in the financial system and urged banks to control risks from credit expansion, signaling no relief from a cash squeeze.

China Rates

China’s benchmark money-market rates last week climbed to a record as the central bank refrained from using open-market operations to ease the cash crunch. The rates still fell for a second day today.

The S&P 500 (SPX) sank 2.1 percent last week, the most since April 19, after the Federal Reserve said it may start paring stimulus measures as soon as September if the economy improves in line with its forecasts.

The benchmark index is down 3.9 percent in June, on course for the biggest monthly drop since May 2012. The gauge has declined 6.2 percent since its May 21 high amid speculation the Fed will scale back quantitative easing that helped fuel a rally in stocks worldwide. The index has stillrallied 132 percent from its March 2009 low.

‘Great Performance’

“We’ve had this great performance in stocks without great economic growth,” Larry Kantor, the New York-based head of research at Barclays Plc, told Anna Edwards on Bloomberg Television. “Those days are over. I suspect over the next couple of months U.S. growth is going to be a little weaker than people are anticipating.”

Treasuries slumped today, pushing the 10-year yield as high as 2.66 percent, a level not seen since August 2011, before data this week that may add to the case for the Fed to slow bond purchases. Reports tomorrow may show U.S. durable-goods orders rose and house pricescontinued to recover, according to Bloomberg surveys of economists.

While U.S. equity volatility reached a six-month high last week, expected stock swings are less than half as much as peaks in the last four years and traders are pricing in little increase for the rest of the year.

Volatility Index

The Chicago Board Options Exchange Volatility Index (VIX) jumped 10 percent to 18.9 for the week. Even after the gauge of options prices on the S&P 500 increased 67 percent since March, it would have to rise 134 percent more to reach its average high of 44 from 2009 to 2012, according to data compiled by Bloomberg. VIX futures expiring in six months trade only 10 percent higher than the index. The gauge jumped 13 percent to 21.45 today.

Financial shares tumbled. Bank of America dropped 3.2 percent to $12.29. Citigroup slipped 2.8 percent to $45.56.

Barrick Gold declined 4.9 percent to $16.06. The precious metal dropped to the lowest since September 2010.

Deere lost 3.2 percent to $79.82 as JPMorgan cut its rating on the world’s largest agricultural-equipment maker to underweight, similar to a sell recommendation, from neutral. Lower crop prices and higher land rent costs may drive profit-per-acre lower, analysts led by Ann Duignanwrote.

Allergan (AGN) Inc. slipped 8.1 percent to $85.15. Deutsche Bank AG downgraded the maker of the Botox wrinkle treatment to hold from buy and Leerink Swann LLC trimmed its recommendation to market perform from outperform.

Vanguard Health Systems jumped 67 percent to $20.61. Tenet will pay $21 a share in cash for the Nashville, Tennessee-based hospital operator and will assume $2.5 billion of Vanguard debt, the companies said in a joint statement