Forex interest rates carry is a popular trading strategy that involves taking advantage of the interest rate differential between two currencies. This strategy is also known as the carry trade and has been used by traders for decades. In this article, we will take a closer look at how Forex interest rates carry works and why it is such a popular strategy among traders.
What is Forex Interest Rates Carry?
Forex interest rates carry is a trading strategy that involves borrowing money in a currency with a low-interest rate and investing it in a currency with a higher interest rate. The goal of this strategy is to earn the difference between the two interest rates, which is known as the carry. The carry can be positive or negative, depending on the difference between the two interest rates.
For example, if you borrow money in Japanese yen, which has a low-interest rate, and invest it in Australian dollars, which has a higher interest rate, you will earn the difference between the two interest rates. If the interest rate differential is 2%, then you will earn 2% on your investment.
How Does it Work?
To understand how Forex interest rates carry works, let’s take a look at how interest rates are determined. Interest rates are set by central banks, and they are used to control inflation and promote economic growth. When a central bank increases interest rates, it makes borrowing more expensive, which can slow down inflation. When it decreases interest rates, it makes borrowing cheaper, which can stimulate economic growth.
When you borrow money in a currency with a low-interest rate and invest it in a currency with a higher interest rate, you are essentially betting that the central bank of the higher interest rate currency will not decrease interest rates. If the central bank does decrease interest rates, your investment will be worth less, and you will lose money.
However, if the central bank does not decrease interest rates, you will earn the difference between the two interest rates, which can be a significant amount of money. This is why Forex interest rates carry is such a popular strategy among traders.
Why is it Popular?
Forex interest rates carry is a popular trading strategy for several reasons. First, it is a relatively low-risk strategy, as long as the central bank of the higher interest rate currency does not decrease interest rates. Second, it can be a profitable strategy, as the difference between the two interest rates can be significant. Finally, it is a long-term strategy, as the carry can be earned over a period of weeks, months, or even years.
Conclusion
Forex interest rates carry is a popular trading strategy that involves borrowing money in a currency with a low-interest rate and investing it in a currency with a higher interest rate. The goal of this strategy is to earn the difference between the two interest rates, which is known as the carry. This strategy is popular among traders because it is relatively low-risk, profitable, and a long-term strategy. However, it is important to note that Forex trading carries risks, and it is important to understand those risks before engaging in any trading activity.
