What is the carry trade?

The carry trade is an investment strategy employed in the currency market. At its most basic level, the carry trade can be explained as an investment strategy where an investor takes a short position in (sells) a low yielding currency and invests the equivalent amount in (goes “long”, or buys) a high yielding currency. The currency sold is often referred to as the “funding currency”. Logically, these funding currencies are typically the lowest yielding currencies globally. Amongst popular funding currencies are the U.S. dollar (USD), the Japanese yen (JPY), and the Swiss Franc (CHF). In contrast, the currency bought is often amongst the highest yielding currencies in the world. These include the Australian dollar (AUD) and New Zealand dollar (NZD). One of the most popular carry trade strategies over recent years has been to short the Japanese yen (JPY) and go long the Australian dollar (AUD).