Carry Trade
Borrowing in a low-interest currency to hold a higher-interest one, collecting the difference.
Also called: carry · positive carry
Written by Javier Sánchez Ros
In plain language
A carry trade earns the interest rate differential daily. It is a strategy about yield rather than direction.
It works quietly for long stretches and then unwinds violently. The accumulated carry can be erased in days when the exchange rate moves against the position.
Carry trades are typically leveraged, since the daily differential is small relative to capital, which amplifies the unwind.
Worked through
The yen carry unwind of August 2024
For years the Bank of Japan held rates near zero while other central banks raised theirs. Borrowing yen to hold higher-yielding currencies paid a small amount every single night, and it had paid reliably for so long that the position stopped being thought of as a position.
On 31 July 2024 the Bank of Japan raised its policy rate. The yen strengthened sharply over the following days, and because the trade was leveraged and enormously crowded, the first wave of exits forced the next: margin calls closed positions, closing positions bought yen, buying yen strengthened it further. On 5 August the Nikkei fell more than 12% in a single session.
Nothing about the daily carry had changed. What changed was the exchange rate, which had been the ignored half of the trade for years. Months of accumulated interest were erased in days — the classic shape of a strategy that wins almost every day and loses everything on the few it does not.
Why it matters
The carry trade is the classic example of a strategy with a high win rate and a devastating tail — profitable most days, occasionally catastrophic.
Common mistakes
- Sizing a carry trade for the yield while ignoring the exchange-rate risk.
- Assuming a long run of quiet accumulation means low risk.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The interest charged or earned for holding a forex position overnight.
Using borrowed capital to control a position larger than your account balance.
The probability that a series of losses reduces an account below the point of recovery.
How much and how quickly an asset’s price moves over a given period.
Two currencies quoted against each other, showing how much of one buys the other.