A carry trade is primarily a strategy that means to borrow a currency on a lower interest rate that allows buying a currency that offers a rate. This strategy enables a trader to identify the difference between the rates that depend on the amount utilized. Not to mention, this strategy is famous in the forex market. Still, there are some shortcomings, like it can be risky because it is highly influential.
What is Carry Trade?
The carry trade aims to benefit from the difference in interest rates when pairing two different currencies. However, this strategy has two aspects, it can sometimes be positive and negative too, and it decides upon the currency you select to pair. Through this strategy, traders can benefit from the difference in interest rates between the base and secondary currency in the Forex pair.
How does Carry Trade Strategy Work?
Carry trade is helpful because it lets you pay a lower interest rate on the asset you intend you borrow. It means you can benefit from higher interest on your purchase. However, many traders have hoped to get higher rates on the currency value.
The process works while trading in the forex market, and traders need to trade on margin, known as leverage. It allows you to put a fraction of the total trade value to exposure to the currency market known as a deposit.
Coming to the point of benefit, if the trade remains successful, the leverage goes in your favor. In contrast, when trade fails, you can get lost. The important point for traders is to be conscious while trading on margin. It would help if you prepared a risk management plan to combat capital loss.
Why is Carry Trade Prevalent?
It is widespread because it can offer you significant returns when leverage is high. Many people have a keen interest in this trade because they can benefit from it.
Risk Friendly Trade
Carry trade offer low risk and have less instability. In this trade, carry traders are more likely to take the risk. Most carry traders invest many funds at stake, and they are satisfied if the currency does not even get one penny high. In this way, they can still earn the leverage return.
When currency does not decrease, carry traders get paid. In addition, traders are more contended and agree to take risks in low instable situations.
List of Currency Pairs for Carry Trade in 2022
Here is the list of currency pairs based on analysis that shows a clear difference between interest rates. This list shows the positive aspect of the carry trade.
- USD/CHF is one of the currency pairs with the most significant exchange size, and it is the most chosen pair of Carry trade. If it gets a negative interest rate, it will enhance this currency pair in return.
- In addition, margin plays a crucial role in carry trade because we get maximum movement and face fluctuations against the current position. The exchange size can even base on an even $100 margin.
- The best pair of currency in Carry trade is AUD/JPY, but it has ranked on the last point due to some reasons. However, it is still recommended as the best pair of strategies.
How to Select the Best Pair of Currency in Carry Trade
You can follow the below-mentioned process to choose the best currency pair for the Carry trade.
- The first thing you need to consider is the difference between interest rates.
- Secondly, you need to follow some principles to purchase one currency consisting of a higher interest rate. At the same time, the currency should have a lower interest rate.
- Thirdly, you can focus on the news and forecasts related to the selected pair and recognize the trend. If you find the trend does not match the trade direction, you can go for another potential pair. Nevertheless, when you apply this strategy, you may face different results.
Popular Currency Pairs of Carry Trade
- Australian dollar/ Japanese Yen
- New Zealand Dollar/ Japanese Yen
- US dollar/ Swiss franc
