What exactly is a carry trade?

Carry trading is considered an advanced level of technology in foreign exchange trading, and cannot be regarded as a preliminary category of basic foreign exchange knowledge. We also mentioned the carry trade before, which is defined as borrowing or selling a financial instrument at a low interest rate, and then using the financial instrument to buy a financial instrument with a higher interest rate. While the financial instrument is paying a low interest rate, you are earning a higher interest rate benefit on the financial instrument you are buying.

Therefore, your profit comes from the spread between the two financial instruments. First of all, what needs to be consolidated here is that when trading a currency pair, you are actually buying one currency and selling another currency at the same time. For example, the Australian dollar against the Japanese yen (AUD/JPY), being long is equivalent to buying the Australian dollar and selling the Japanese yen at the same time. Then the investor will get the interest of buying the currency, which is the interest of the Australian dollar, and needs to pay interest for the selling currency, which is the interest of the Japanese yen.

In the foreign exchange market, due to the characteristics of leverage, the profit and loss of the carry trade will be magnified, and the potential risks will also be magnified while the income is magnified. Because margin trading is carried out, the size of the position that can be held will also be enlarged to achieve the above effect. It is difficult to realize carry trading in spot trading.

The core of the carry trade is based on the position held, so if you close the position quickly in intraday trading, you will not receive or pay interest. Therefore, when choosing a currency pair, you need to choose a currency with a high interest rate, such as the Australian dollar and New Zealand dollar, and a currency with a low interest rate, such as the Japanese yen. Under the current global easing tone, the space for carry trades is getting smaller and smaller, especially the RBA and NYF are cutting interest rates in stages, not raising them, so when choosing a currency with high interest rates, be selective and not Not as much as before.

With changes in the international economic environment and monetary policy changes caused by political factors, the yen series of carry trades are no longer favored. According to the market summary, when the market risk aversion is low, the effect of carry trade will be better, and when the market risk aversion is high, the effect of carry trade will be average. Many foreign institutions have carry trading as one of their businesses, but it is not so mainstream in China, because the overall degree of difficulty is still relatively high, so it is not recommended for beginners to try it.