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.
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.
Frequently asked about carry trade
What is a carry trade in trading?+
A trade where you borrow a low-interest currency to buy a high-interest currency, profiting from the rate differential.
When will I see carry trade used in real trading?+
Whenever there's a wide rate differential between two currencies. The classic plays are USD/JPY, AUD/JPY, NZD/JPY, MXN/JPY.
What is the most common mistake traders make with carry trade?+
Treating carry trades as risk-free income. They're not. The carry can be wiped out in a single bad week of currency movement, especially during risk-off events.
What do experienced traders know about carry trade that beginners don't?+
Always pair carry trades with VIX awareness. When VIX spikes above 20, carry unwinds become more likely. Reduce or hedge carry positions when volatility expectations rise.
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