Carry trade
A carry trade is a strategy of borrowing a low interest rate currency and investing in a high-rate one to earn the rate difference. The main risk is a sharp move in the exchange rate.
How it works
The classic example is borrowing Japanese yen at a low rate and buying the currency of a high-rate country. In forex this looks like buying a pair such as AUD/JPY or USD/JPY and holding it: the broker credits a positive swap each day if the rate difference is in your favour.
Swap income is small and slow, while the exchange rate can wipe out a month of it in a day. Carry trades work well in calm periods and reverse hard in a panic: investors rush to close positions, the funding currency (often the yen) jumps, and the move feeds on itself.
One such unwind happened in early August 2024: after a Bank of Japan rate hike and weak US data, the yen rallied sharply, and mass closing of carry positions added to volatility in stock markets.
Country A's rate is 5% and country B's is 0.5%. You buy 1 lot of the A/B pair and hold it for a year. The rate gap is about 4.5% a year on a 100,000-unit position, roughly 4,500 units before the broker's swap markup. But a drop of just 5% in the pair would lose about 5,000 and erase all of that income.
The beginner mistake is looking only at the positive swap and using high leverage, thinking it is passive income. The swap is tiny compared with currency swings, and with leverage a reversal can end in a stop out. Treat exchange rate risk as the main risk, keep size moderate with a stop, and see the swap as a bonus, not the reason for the trade.
Questions and answers
What is a carry trade in simple terms?
It is borrowing money in a currency with a low interest rate and investing it in one with a high rate to earn the difference.
Why is the yen often used for carry trades?
Because Japanese interest rates stayed very low for a long time, which made borrowing in yen cheap.
What is the risk of a carry trade?
A sharp move in the exchange rate: in a panic carry positions are closed en masse, and the rate can move more in days than the swap pays in a year.
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Updated: 2026-10-19