Market

Carry trade

Holding a higher-yielding currency against a lower-yielding one to earn the rate differential.

A carry trade buys a currency with a relatively high interest rate and sells one with a low rate, collecting the difference as a daily swap credit. For years this was a mainstay strategy in pairs such as AUD/JPY.

The risk is that the accumulated carry is small and steady while the exchange-rate move against you can be large and sudden. Carry trades tend to unwind violently during risk-off shocks, wiping out months of interest in days.

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