Joseph215_ Scott

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What are global carry trades and how do they drive currency cycles?

Carry trades involve borrowing in low-interest currencies (funding currencies like JPY or CHF) and investing in high-yield ones (AUD, NZD, EM FX). When global risk appetite is strong, carry trades flourish, boosting high-yield currencies. When crises hit, they unwind violently as investors rush back into funding currencies. Example: AUD/JPY is a classic barometer—rising in risk-on, crashing in risk-off. Institutions monitor interest rate spreads, volatility indices (like VIX), and funding costs to gauge carry trade sustainability. Retail traders can use swap rates as indicators of carry attractiveness. Benefits: steady returns in stable times. Risks: devastating losses in unwinds, often wiping out years of gains in days. Carry trades explain why some currencies behave more like risk assets than monetary units, linking forex to global credit cycles.