Carry trade is a trading strategy based on the difference in interest rates between two countries. It is one of the most popular speculative strategies in the Forex currency market. The strategy involves buying a high-yield currency with a high interest rate and selling a low-yield currency. The profit in this approach comes from the difference in interest rates between the two countries.
The carry trade strategy is commonly used on currency pairs such as Australian dollar/Japanese yen (AUDJPY), New Zealand dollar/Japanese yen (NZDJPY), and British pound/Swiss franc (GBPCHF). Recently, the US dollar has become a popular low-yield currency due to a sharp decline in interest rates in the US. Traders choose these pairs because they offer significant differences in interest rates.
Therefore, using the carry trade strategy requires an initial assessment of the yield of the currencies being traded.
FAQ
What is a carry trade strategy?
A carry trade strategy involves buying a high-interest-rate currency and selling a low-interest-rate currency to profit from the interest rate differential.
Which currency pairs are commonly used for carry trade?
Common pairs include AUDJPY, NZDJPY, and GBPCHF, as they typically have significant interest rate differences.
Why is the US dollar used in carry trade?
The US dollar is often used as a low-yield currency due to recent reductions in US interest rates, making it a popular choice for traders seeking to capitalize on rate differentials.
