It’s pretty simple to find a suitable pair to do a carry trade. Look for two things:
- Find a high interest differential.
- Find a pair that has been stable or in an uptrend in favor of the higher-yielding currency. This gives you the ability to stay in the trade AS LONG AS POSSIBLE and profit from the interest rate differential.
Pretty simple, huh?
Let’s take a real-life example of the carry trade in action:
This is a weekly chart of AUD/JPY. During this time, the Bank of Japan had maintained a “Zero Interest Rate Policy” with the interest rate near zero at 0.10%).
Also known as ZIRP.
With the Reserve Bank of Australia touting one of the higher interest rates among the major currencies (4.50% in the chart example), many traders flocked to this pair (one of the factors creating a nice little uptrend in the pair).
From the start of 2009 to early 2010, this pair moved from a price of 55.50 to 88.00.
That’s 3,250 pips!
If you couple that with interest payments from the interest rate differential of the two currencies, this pair has been a nice long-term play for many investors and traders able to weather the volatile up-and-down movements of the currency market.
Of course, economic and political factors are changing daily.
Interest rates and interest rate differentials between currencies may change as well, bringing popular carry trades (such as the yen carry trade) out of favor with investors.
