JustChartsWhat Is a Carry Trade in Forex? How It Works and Why It Unwinds
A carry trade means borrowing (selling) a currency with a low interest rate and buying one with a higher rate, earning the difference — the “carry” — for as long as the position is held. In forex this shows up as a positive daily swap. It pays steadily when markets are calm but can lose quickly when the funding currency suddenly rises, as in the August 2024 yen carry-trade unwind.
Key facts
- Sell
- low-yielding funding currency (often JPY or CHF)
- Buy
- higher-yielding currency
- Earn
- the interest-rate difference, via positive swap
- Main risk
- the funding currency rallying sharply
- Works best
- calm markets with stable rate gaps
How a carry trade works
Suppose Japanese rates are near zero and another country’s rates are much higher. Buying that country’s currency against the yen means you effectively borrow yen cheaply and hold the higher-yielding currency. Each night your broker credits a positive swap that reflects the rate gap, minus its markup.
Why carry trades are popular
- They earn income even if the exchange rate doesn’t move.
- In calm periods, carry currencies also tend to drift higher as more investors pile in.
- Funds use them at very large scale, which is why they can move markets.
The risk: unwinds
The interest earned is small each day, but the exchange-rate risk is large. When fear rises or the funding currency’s central bank turns hawkish, many traders close at once: they buy back the funding currency, which rises sharply, forcing more closing. In early August 2024, a Bank of Japan rate rise and weak US data triggered a rapid yen rally and a sharp fall in global stock markets as yen carry trades were unwound.
Carry trade checklist
- Check the swap on both sides — a wide broker markup can wipe out the carry.
- Watch risk sentiment and the VIX; carry trades suffer in panics.
- Size positions for exchange-rate moves, not for the interest you hope to earn — see drawdown.
- Follow both central banks’ meetings: a narrowing rate gap ends the trade.
Frequently asked questions
What is the yen carry trade?
Borrowing in Japanese yen, where interest rates have long been very low, to invest in higher-yielding currencies or assets. It unwinds when the yen rises sharply.
Is the carry trade profitable?
It can be in calm markets, but a sudden move in the funding currency can wipe out months of interest in days.
How do I earn carry as a retail trader?
Hold a position long the higher-yielding currency against the lower-yielding one past the daily rollover, and check that your broker’s swap is actually positive after its markup.
Put it into practice
Live charts, an economic calendar and trading calculators — free with a JustCharts account.
See central-bank interest ratesThis article is for education only and is not financial advice. Trading leveraged products carries a high risk of losing money. Contract sizes, trading hours and leverage limits vary by broker and country — always check your own broker’s specifications.