Carry Trades Are Back in Focus!

As the Fed promised to keep interest rate at a historical low of nearly zero, forex carry trades again draw the market‘s attention. Bloomberg’s analysis over 32 currencies shows that Indonesian rupiah offers the highest risk-to-reward rate in carry trades, followed by Turkish lira and Indian rupee.

Source: Bloomberg

Carry trade refers to the practice to make profit by borrowing a low-yielding currency and then investing in another high-yielding currency (such as emerging market currencies). Analysis indicates IDRs carry-to-risk ratio is 0.85, TRY at 0.73 and INR at 0.56. Only about half of the surveyed currencies have interest rate higher than USD.

After the Fed flooded the global financial system with US dollar to avoid credit squeeze, the recent forex volatility has fallen back from a decades high, making carry trades attractive again. The increasingly active carry trade market has thus seen an influx of international investors who want to seize the opportunity to make a fortune.

So here comes the question: Do carry trades bear risks？ Just like any type of trading, carry trades involve certain degrees of risks. The prerequisite for making profits through carry trades is low market volatility, so a main risk facing carry traders is forex rate fluctuation. If forex rates fluctuate significantly, carry trade investors may end up losing not only their gains but also the principals. Therefore, investors need to conduct effective risk management in trading, keep a close eye on global forex dynamics and watch out for “black swan events”.

As a leading forex media, WikiFX brings you live global forex updates 24/7 and industry dynamic interpretation to guide investors on their forex trading path. In addition, WikiFX has recorded the information of over 18,000 brokers across the world, offering investors a comprehensive evaluation of brokers compliance and quality. Click here to download the WikiFX App https://bit.ly/3ajawKO