Don’t waste your time – keep track of how NFP affects the US dollar!

Thank you for visiting our website

The ASIC policy prohibits us from providing services to clients in your region. Are you already registered with FBS and want to continue working in your Personal area?

Personal area

Facebook like

Carry trade

Information is not investment advice

It is a type of trading in which a trader sells a certain currency with a low interest rate and then uses it to purchase another currency that yields higher interest. The main goal of a carry trader is to capture the existing divergence in interest rates and earn substantial profits with help of leverage.

Assume you notice that interest rates in South Africa are 7%, while the current interest rates in the US are 1%. So, you expect to earn 6% difference between the two rates. For this to happen, you should borrow USD (the low-yielding currency, the issuer of which set a relatively low interest rate), and buy a higher-yielding currency, in our example it is South African Rand. You may increase the amounts of money you earned using leverage. For example, if you use a standard 10:1 leverage ratio you can earn a profit of 60%. But there is a big risk behind this – the unpredictability of exchange rates. If the ZAR was to drop against the USD, you would lose a great part of your return. Find out what is the carry trading strategy?

So, although carry trades look very attractive, they are quite risky especially in troublesome, uncertain times when investors tend to rush into low-yielding safe-havens neglecting risky financial assets, which offer higher returns.

Profits earned through the carry trade may not be a primary goal of the trader, they could be a good addition to the gains he/she earns on price fluctuations. 

Example of a trader

33.png

Julian Robertson is one of the most famous carry traders the history knows. He used to trade USD/JPY. In the period between 1995 and 1998, this currency pair appreciated more than 66%, in part thanks to carry traders buying high-yielding currencies and selling the yen. The trader could make 15% profits on the interest rate differentials adding to 66% he gained on the surge in USD/JPY. Julian Robertson was trading USD/JPY with leverage and earned lots of money in that period, although after the 1998 sudden appreciation of the yen, he lost $2 billion.

Latest news

EUR/USD recovered losses, all eyes on US Retail Sales

EUR/USD is recovering after the enormous slump on Monday. Follow US Retail Sales at 15:30 MT time!

Gold dropped, market awaits Fed meeting on Wednesday

Gold has plunged amid the stronger US dollar as investors await the Fed’s meeting this week.

Will the economic data drive the USD up?

The United States will release retail sales and producer inflation (PPI index) numbers at 15:30 MT time on June 15.

Got questions? FBS Oceania Customer Support is ready to help!

Contact us via email at support@fbsaustralia.com

or

Start Live Chat