What Is Carry Trade?
A carry trade exploits the interest rate differential between two currencies. The trader borrows in a low-interest-rate currency (historically JPY, more recently EUR or CHF during ZIRP eras) and buys a higher-yielding currency. The daily interest differential is paid in their favor as 'rollover.'
The risk: currency moves can wipe out years of carry gains in days. The textbook example is the 2008 JPY/AUD blow-up — years of small daily gains evaporated in weeks as risk-off flows reversed the carry. 'Picking up pennies in front of a steamroller' is the classic critique.
Carry trades work in low-volatility, risk-on environments and break in risk-off panics. They're popular among institutions but tricky for retail because the leveraged returns require large positions, and stop-losses tend to fire precisely when the carry would have recovered if held. Position sizing is everything.
Related terms
- Forex
- Pip — Smallest standard price increment in a forex pair — typically 0.0001 (or 0.01 for JPY pairs).
- Leverage — Borrowed capital used to increase trade size beyond what cash alone allows.
- Volatility — A statistical measure of how much an asset's price varies over a period.