Carry Trade
Learn how to potentially profit from interest rate differentials between currencies.
Last reviewed: 2026-03-06
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Overview
A carry trade involves borrowing in a low-interest currency and investing in a high-interest currency. You earn the interest differential (swap) while holding the position. Risk: the high-yield currency can depreciate, wiping out interest gains.
How It Works
Sell (borrow) a low-yield currency like JPY or CHF. Buy (invest in) a high-yield currency like AUD, NZD, or TRY. Hold the position and earn the swap. Works best in calm, risk-on environments.
Swap Explained
Swap is the overnight interest paid or received for holding a position. Long high-yield / short low-yield earns positive swap. Your broker credits or debits it daily.
Risks
Currency risk: the high-yield currency can fall, erasing swap gains. Rate risk: if the low-yield central bank hikes, the trade becomes less attractive. Risk-off events (crashes) often hurt carry trades.
When To Use
Use when rate differentials are wide and volatility is low. Avoid when risk sentiment is negative or when central banks are shifting policy. Monitor swap rates and correlation to risk assets.
Knowledge check
1 of 3What is swap in forex?
FAQ
Common questions about this topic.
What is swap in forex?
Overnight interest paid or received for holding a position. Long high-yield / short low-yield earns positive swap. Credited or debited daily by your broker.
When do carry trades fail?
During risk-off events—crashes, flight to safety. Investors unwind carry positions and buy low-yield safe-haven currencies (JPY, CHF), causing high-yield currencies to fall.
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Disclaimer and sources
Educational content only. Not financial advice.
Important disclaimer
Forex trading involves substantial risk of loss. This content is for educational purposes only and is not financial advice.