Carry Trade

In general, the forex trading strategy known as the "Carry Trade" refers to an increasingly widespread forex
trading strategy that is usually implemented over longer term time frames and involves taking advantage of the interest rate differential prevailing between two currencies.

Furthermore, using such an interest rate strategy in your forex trading will make the most sense if you use a forex broker that provides particularly attractive rates on rollovers for the currency pair you are most interested in putting on a carry trade with.
Profiting From Interest Rate Differentials

Since carry traders basically look to capture the interest rate differential between two currencies, as well as hopefully some additional appreciation from favorable exchange rate movements, they need to choose their pairs wisely based on two primary criteria.

The first is the magnitude of the interest rate differential itself. The absolute value of this differential can be readily computed by subtracting the higher interest rate from the lower interest rate for each currency involved. The interest rates used will be those prevailing for Interbank deposit rates for the time period during which the carry trade will be kept on for.

The second consideration is the likelihood of appreciation of one currency versus the other. Since carry trades tend to be longer-term positions, a combination of fundamental and technical analysis is often used to arrive at this forecast.

For the best carry trade scenario, you will want to choose the highest interest rate currency that stands the best chance of appreciation against the lowest interest rate currency according to your forecast for the future exchange rate over your time frame of interest.
Carry Trade Profits and Risks

Not only do carry traders hope to capture the resulting favorable interest rate differential or "positive carry" as it is often called, but they usually also plan on benefitting from interest rate compounding effects, as well as from any currency appreciation seen.

The sum of these factors at the time the trade is closed out will determine their profit or loss on the carry trade.

In terms of risk management, the interest rate differential provides something of an initial protective buffer against losses that might accrue due to adverse exchange rate movements. Nevertheless, stop losses can be placed at strategic points that stand a reduced chance of being executed as an additional form of risk management. Learn more about the risks with carry trading.
Additional Profits or Costs of Rollovers

Rollovers of currency positions tend to be executed automatically by most online forex brokers if the position is held over the time of 5 PM Eastern Standard Time.

An automatic rollover means that the broker will automatically close out your existing forex position for value spot and roll it forward for value one additional business day in the future. Since rollover rates can vary substantially among forex brokers, make sure you choose a broker with competitive rollover rates if you intend to put on carry trades.

Generally, when forex traders have their currency positions rolled, they will get paid pips to do so if they are holding the higher interest rate currency. On the other hand, if they are holding the lower interest rate currency, they will pay pips away when their position is rolled over.
Hedged Carry Trades

Yet another type of carry trade involves hedging one long carry trade with another short carry trade using different currency pairs that are closely correlated and which results in a net interest rate benefit to the overall position.

For example, a hedged carry trader might exploit interest rate differentials between well correlated currency pairs like the following:

EUR/USD and USD /CHF

AUD/USD and NZD/USD

GBP/USD and USD/CHF

EUR/JPY and CHF/JPY

GBP/JPY and CHF/JPY

Yen Misses Out on Flows to Risk-Off Currencies

EUROPEAN SESSION UPDATE: Euro fails to react to a better than expected German business climate survey; PM Abe said the Japanese economy has benefitted from Forex movements…

We seem to be watching another risk-off session in today’s Forex trading, as the Franc and US Dollar are showing the biggest wins, and the three commodity currencies, CAD, NZD, and AUD, are showing the biggest losses. Equities have traded lower in both the European and Asian markets, and US futures are also pointing downwards.

However, the Yen does not seem to be showing any significant gains in today’s risk-off trading, possibly explained by a widespread rise in 10-year bond yields from many different countries, with the exception of Japanese government bonds.

There was little data in today’s European session, and a better than expected rise in the German IFO business climate survey failed to move the Euro significantly higher. Meanwhile, the Swiss 10-year bond yield rose above 1.00% for the first time since October 2011.

In Asia, Japan PM Abe further broke a taboo for Japanese officials to discuss Yen levels, as the leader said Forex movements until now have been positive for the economy. In China, further worries over a lack of liquidity and a Goldman Sachs downgrade of its Chinese growth forecast sent the Shanghai Composite index 5.30% lower and below 2000 for the first time since December.

The US Dollar is currently trading slightly below 98.00 against the Yen, and USD/JPY may again see support around 96.50. The pair may see further resistance by the 99.00 figure.

(How does a Currency War affect your FX trading? Take our free course to find out!)

Dollar Index Reaches 2-Week High as Fed View Boosts U.S. Yields

The Dollar Index rose to a two-week high as the yield differential between U.S. and Japanese government securities increased to the widest in almost two years, increasing the appeal of dollar-denominated assets.

The U.S. currency rose against all but one of its 16 major counterparts before U.S. reports tomorrow that economists said will show durable-goods orders gained and house pricesincreased as the Federal Reserve may reduce monetary stimulus. A gauge of currency volatility climbed to the highest since June 2012. Chinese stocks fell the most in four years, damping investor interest in riskier currencies. The Swedish krona slid to a seven-month low versus the dollar.

Enlarge image

Stacks of U.S. $100 bills are arranged for a photograph in New York, U.S. Photographer: Scott Eells/Bloomberg

3:15

June 20 (Bloomberg) -- Ford Motor Co. Chief Executive Officer Alan Mulally talks about Japan's currency policy, the automaker's production in Asia and growth strategy in China. He speaks with Bloomberg's Stephen Engle in Nanchang, China. (Source: Bloomberg)

4:53

June 19 (Bloomberg) -- Mitul Kotecha, the global head of foreign-exchange strategy at Credit Agricole SA in Hong Kong, talks about Japan's currency, government and central bank policies. Kotecha also discusses the prospects for Federal Reserve policy and emerging-market currencies. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg)

“Long-term yields in the U.S. have continued to jump higher over the last week,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “That’s driving some inflows and strength into the U.S. dollar. There’s been a reassessment of the whole liquidity story and what will be the impact on rates across the board.”

The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the U.S. currency against those of six trading partners, rose 0.3 percent to 82.531 at 8:57 a.m. in New York after climbing to the highest level since June 5.

Currency Levels

The dollar advanced 0.2 percent to $1.3101 per euro after appreciating to the strongest level since June 6. The U.S. currency weakened 0.4 percent to at 97.50 yen. The yen added 0.5 percent to 127.77 per euro.

JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency option premiums, rose to as high as 11.83 percent today, the most since June 1, 2012. The gauge has averaged 8.76 percent in the past year.

Sweden’s krona declined versus all 16 of its major peers as the CSI 300 Index of Chinese stocks fell the most in four years, signaling a bear market. The currency dropped 1.3 percent to 6.7550 per dollar after depreciating to the least since Nov. 21. It has tumbled 4.4 percent in the past week.

The Norwegian krone fell against the majority of its most-traded counterparts, slipping as much as 1.6 percent to 6.1539, the lowest since July 17.

Treasury Yields

Treasuries due in two years yielded 0.28 percentage point more than similar maturity Japanese sovereign debt, the biggest premium since July 2011, according to Bloomberg data.

“The fundamental picture for the dollar is clearly positive,” said Marcus Hettinger, a currency strategist at Credit Suisse Group AG in Zurich. “The expectation that the Federal Reserve may start reducing asset purchases leads to higher U.S. yields supporting the dollar.”

The Dollar Index jumped 1 percent on June 19 when Chairman Ben S. Bernanke said policy makers may begin reducing their quantitative-easing program this year and end it in mid-2014 if the economy is achieving the central bank’s objectives. The Fed purchases $85 billion of bonds each month.

Fed Bank of Dallas President Richard Fisher, one of the most vocal critics of the central bank’s quantitative easing, is due to talk about U.S. monetary policy and the economy today in London. This week will also see speeches from Bank of Atlanta President Dennis Lockhart, Bank of Richmond President Jeffrey Lacker, Bank of Cleveland President Sandra Pianalto and Bank of San Francisco President John Williams.

U.S. durable-goods orders increased 3 percent in May after rising a revised 3.5 percent the previous month, according to a Bloomberg News survey before tomorrow’s Commerce Department report. The S&P/Case-Shiller index of home values for 20 cities climbed 10.6 percent for the year ended April after a 10.9 percent gain in March that was the biggest since 2006, a separate survey showed.

How Does Forex Trading Work?

Forex trading is typically done through a broker or market maker. As a forex trader  you can choose a currency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.
forex trades can be placed through a broker or market maker. orders can be placed with just a few clicks and the broker then passes the order along to a partner in the interbank market  to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

Dollar Boosted By Strong Chicago PMI Data and other Top Forex News.

The dollar surged higher against most major currencies on Friday after Chicago PMI data beat all expectations, adding to speculation the Fed may soon begin to scale back its $85 billion bond-buying program.

The Chicago purchasing managers’ index (PMI) climbed to 58.7 this month from 49.0 in April, beating analysts expectations for a rise to 50.0. Any level above 50 indicates expansion. The data was the largest increase in Chicago PMI for over 30 years.

In a separate report Thomson Reuters/University of Michigan’s final consumer sentiment index rose to 84.5 in May from 83.7 in April, also beating analysts predictions who were expecting the index to remain unchanged.

The positive news increased speculation that the Fed will soon begin to taper its asset purchase program, which weakens the dollar.

In Europe the single currency was hit by record unemployment figures this morning when official data showed that the unemployment rate rose to a new record high of 12.2% in April, from 12.1% the previous month, in line with expectations.

In todays U.S. session, EUR/USD was down 0.65 percent at 1.2962, up from a session low of 1.2945 and off from a high of 1.3049. whilst USD/JPY was up by just 0.07 percent at 100.65. The dollar was also slightly higher against the pound, rising 0.34 percent to 1.5182.

More Coverage of the Day’s Top Story

• FT: Emerging market currencies suffer heavy losses. – Emerging market currencies suffered heavy losses and the dollar index rose as investors bet that improving data on the U.S. economy would encourage the Federal Reserve to reduce its monetary stimulus that has boosted investment into riskier assets.
• DailyFX: USD Correction takes shape ahead of Fed Beige book, NFPs. – The Dow Jones-FXCM U.S. Dollar regained its footing on Friday amid the slew of positive developments coming out of the world’s largest economy.

More Top Stories:

WSJ: End to dollar’s 10-year downtrend may be near. – The U.S. dollar is making a comeback that may mark the end of a decade-long downtrend in the currency, said Jens Nordvig, global head of G10 foreign-exchange strategy at Nomura in New York.

The Australian: Aussie dollar near two-year low. – The commodity currency’s month-long slide eclipsed its sudden and dramatic retreat of a year ago when global markets were shaken by a sovereign-debt crisis in Greece, which subsequently engulfed Europe.

New Zealand Herald: NZ dollar falls on fears of further intervention. – The New Zealand dollar fell after Reserve Bank governor Graeme Wheeler said yesterday he is prepared to keep intervening in foreign exchange markets to limit the rise of the local currency.

Investing.com: GBP/USD pushes lower after U.S. data. – The pound pushed lower against the U.S. dollar on Friday, as upbeat U.S. data added to expectations for the Federal Reserve to scale down its bond-buying program, sending the greenback broadly higher.

Reuters: Gold falls on dollar recovery, but set for 2nd weekly gain. – Gold fell on Friday, as the dollar extended gains after positive U.S. consumer sentiment data raised uncertainty over the Federal Reserve’s monetary easing, but prices were still on track for their second weekly gain.

MarketPulse FX: USD/JPY falls after Japan deflation continues and industrial output drops. – Japan’s core consumer price index fell 0.4 percent in April from a year earlier, while industrial production also weakened, the government reported Friday.

WSJ: Canadian dollar retraces losses after Canada 1Q GDP. – The Canadian dollar retraced some of its losses Friday after a slightly better-than-expected release of Canada’s gross domestic product growth in the first quarter of the year improved the outlook for the currency.