The carry trade means buying a high-interest currency against a low-interest one and earning the swap every night.
1Borrow lowfund in a 0.5% currency
2Buy highhold a 5% currency
3Earn the gappositive swap every night
4Watch outrisk-off can erase months in days
Example
If Country A pays 5% and Country B pays 0.5%, buying A/B could earn a positive swap each night (after broker markups), on top of any price gain.
When it works
Calm, risk-on markets where investors are happy to chase yield. Carry trades can trend for months.
When it breaks
In a risk-off panic, investors rush back to safe havens, and carry trades unwind fast. Months of swap income can vanish in days.
Wick says
Carry trades are like picking up coins in front of a steamroller. Lovely coins. Very big steamroller.
Key takeaways
- Buy high yield, sell low yield, earn the swap.
- Works best in calm, risk-on markets.
- Unwinds violently in risk-off events.