When do carry trades work and not work?

When do carry trades work?

Carry trades work when investors’ sentiment towards the market is positive towards high risk currencies compared to safe haven currencies. This is when investors go for high yield currency investments and so they choose to sell off the low risk to purchase more of the high risk currencies in the market. Such pairs include, NZD/JPY,AUD/JPY, NZD/CHF,NZD/JPY,USD/JPY.

When the country’s central bank increases or plans on increasing the interest rates. Investors will be attracted by the currency’s appreciation and high yield from the high interest rate.

Carry trade also works better when the markets are optimistic. Uncertainties  and fear cause investors to unwind their carry trades.

When do carry trades not work?

When the countries economic conditions are not good and the central bank decides to cut the interest rates. This discourages foreign investors and those holding the currency chose to sell  it off  looking for more yielding investments.

Carry trades criteria and risk

Find a pair with the highest interest rate differential

The pair should be stable or in favor of an uptrend for the currency with a high interest rate.

Carry trade risk

Identity your risk before entering a trade. Study the current economic conditions in the countries involved and relate to fundamental and technical analysis.

Check your position size and money management principle.

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