When do carry trades work?

Carry trades work best when investors feel risky and optimistic enough to buy high-yielding currencies and sell lower-yielding currencies.

It’s kinda like an optimist who sees the glass half full. While the current situation might not be ideal, he is hopeful that things will get better.

The same goes for carry trade.

Economic conditions may not be good, but the outlook of the buying currency does need to be positive.

If the outlook of a country’s economy looks as good as Angelina Jolie or Brad Pitt, then chances are that the country’s central bank will have to raise interest rates in order to control inflation.

This is good for the carry trade because a higher interest rate means a bigger interest rate differential.