Carry Trade

A carry trade is a forex strategy that involves borrowing in a currency with a low interest rate and investing in a currency offering a higher interest rate, profiting from the interest rate differential. For example, a trader might sell the Japanese yen and buy the Australian dollar to earn the rate difference, known as the carry. While potentially profitable in stable markets, carry trades are vulnerable to sudden risk-off sentiment, which can cause sharp reversals as traders rapidly unwind positions, often amplifying losses beyond the carry earned.