Return of the Carry Trade

The carry trade – a phenomenon of the forex markets where traders short low-yielding currencies in favor of higher-yielding currencies – seemed to be pretty much left for dead as Central Banks adopted zero-bound interest rates and a policy of quantitative easing to deal with the on-going economic crisis. The only countries that continue to offer high interest rates belong to the developing and emerging class that because of their inherent greater risks, are forced to offer premiums to attract investment. The forex carry trade is based on the fact that traders must pay interest on the money they borrow, while receiving interest on the currency they buy. Naturally, interest rates vary depending on the currency, so traders strive to borrow a currency that requires them to pay as little as possible, while holding a currency that pays considerably more. The difference between the two rates is known as carry which, if positive, the trader gets to keep as profit. As long as exchange