Carry trade

Trading

Definition

Borrowing in a low-yielding currency and investing in a high-yielding one, pocketing the rate differential. Most famous: yen carry trade (borrow JPY at ~0%, buy USD/AUD/MXN at 4-8%). Profitable until the funding currency rallies, in which case it unwinds violently — see August 2024 yen-spike, March 2020 USD-spike.

Example

Borrow JPY at 0.1%, convert to AUD, deposit at 4.3%. Earn 4.2%/year on the spread. If JPY/AUD rises 10% suddenly, the loss on currency wipes years of carry yield.

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