Learning About Carry Trades
With all the talk about interest rate differentials, many of you are probably scratching your heads wondering what’s this all about. And chances are that whether you’ve done some commodity online trading, or you’ve dabbled in stocks, or even in the foreign currency market, you’ve heard about carry trades.
This strategy is viewed by many investors as another way of looking at the market. It has rendered returns to many since the early 1980s and today, it’s become very popular.
The carry trade is simply the purchase of a high yield currency and funding such purchase with a low yielding monetary unit. It’s much like what the pros practice in the stock market; they buy low and sell high.
Among the most purchased carry trade currency pairs are the Aussie Dollar and the Japanese Yen, the New Zealand Dollar and the Japanese Yen to name but a few. The interest rate differential of these units is quite high.
What most traders do i.e. before investing in the Yen carry trades is look at the list of currencies and see which one offers a high yield and which ones offer a low yield.
One of the most important aspects of entering into a carry trade is the possibility of earning interest. You’ll find that a trader’s income accrues daily for the long carry trades. Most of the brokers offer triple rollover rates in the middle of the week to make up for Saturdays and Sundays.