📰 Fundamentals & Macro·advanced

Carry Trade

A trade where you borrow a low-interest currency to buy a high-interest currency, profiting from the rate differential.

A carry trade is the practice of borrowing in a currency with low interest rates and using the proceeds to buy a currency with high interest rates. You pocket the difference between the two rates as a steady stream of income (the "carry"), and you also profit (or lose) on any currency appreciation. The classic carry trade has been long USD/JPY for the past two decades. Borrow yen at near-zero rates, buy dollars at 5%+ rates, earn the 5% gap as carry. You make money even if USD/JPY doesn't move — and you make even more if it appreciates. The risk of carry trades is the unwind. When something spooks the market and risk-off sentiment takes over, traders rush to close their carry positions. The high-yield currency crashes. The funding currency rallies. USD/JPY can drop 500+ pips in days when a carry unwind hits — exactly what happened in August 2024.

Real trade example

The Aug 2024 yen carry unwind was a textbook example — USD/JPY collapsed 1,800 pips in three weeks as carry traders rushed to exit positions during the global risk-off panic. Years of carry profits were erased in days.

Related terms

Interest Rate

intermediate

The cost of borrowing money set by a central bank — the single most important driver of currency strength in modern forex markets.

Swap

intermediate

The interest you pay or earn for holding a forex position open overnight — based on the rate difference between the two currencies in the pair.

Rollover

intermediate

The daily process where your broker settles overnight interest on open positions — happens at 5pm New York time.

Risk-Off

intermediate

Market sentiment when investors are scared and seeking safety — typically bullish for safe havens and bearish for risk assets.

Safe Haven

intermediate

An asset that investors buy when they're scared — historically the US dollar, Japanese yen, Swiss franc, gold, and US Treasuries.

Unemployment Rate

beginner

The percentage of the labor force that is jobless and actively seeking work — a key measure of economic health.

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