carry trade - definition

A carry trade is a forex strategy where a trader borrows a low-yielding currency to fund a position in a higher-yielding currency, profiting from the interest rate differential. The trader earns the difference between the two currencies' overnight interest rates (swap) each day the position is held. This strategy works best in stable or trending markets where the exchange rate does not move significantly against the position; it loses money if the higher-yielding currency depreciates more than the interest earned.

Carry profit = (Interest rate of long currency − Interest rate of short currency) × Position size × Days held − Currency move (if any)

If the currency move is zero or favourable, profit equals the pure interest differential.

A trader buys 1 lot (100,000 units) of AUD/JPY. The Reserve Bank of Australia (RBA) cash rate is 4.10%, and the Bank of Japan (BOJ) rate is 0.10%. The daily swap rate for long AUD/JPY is +0.15 AUD per 1,000 AUD notional. Holding the position for 30 days with no exchange rate movement yields: 100 × 0.15 AUD × 30 = 450 AUD in carry profit.

• JPY pairs: The Bank of Japan's ultra-low or negative rates make JPY the classic funding currency, but sudden yen strength (e.g., intervention) can wipe out months of carry gains in days.
• ASIC regulation (Australia): Australian brokers must disclose swap rates in the Product Disclosure Statement (PDS). Some brokers offer Islamic (swap-free) accounts, which disable carry for certain clients.
• Weekend triple swap: Most brokers apply triple swap on Wednesday nights (for spot forex), meaning carry earned or paid is tripled—this can amplify both profit and loss.

• swap
• interest rate differential
• overnight funding
• major currency pairs