What is Currency Carry Trade?

Currency carry trade is a strategy in which an investor borrows money in a currency with low interest rates and invests it in another currency with higher interest rates. The investor aims to profit from the interest rate differential between the two currencies.

How it  works?

Borrowing: The investor borrows money in a currency where interest rates are low, such as the Japanese yen or the Swiss franc.

Investing: The borrowed money is then invested in a currency with higher interest rates, such as the Australian dollar or the New Zealand dollar.

Profit: The investor earns the interest rate differential between the two currencies as profit. If the interest rate differential is favorable and the exchange rate between the two currencies remains stable or moves in the investor’s favor, the investor can make a profit.

However, currency carry trade comes with risks. Exchange rate fluctuations can erode profits or even lead to losses if the borrowed currency strengthens significantly against the invested currency. Additionally, changes in interest rates or shifts in market sentiment can impact the profitability of the trade. Therefore, it’s essential for investors to carefully manage their risk exposure when engaging in currency carry trade strategies.