“Borrow in a cheap currency, hold an expensive one, and get paid the difference while you wait.”
Verdict: mixedIf one currency's interest rate is 4% and another's is 0%, being long the first against the second earns roughly 4% a year, as long as the exchange rate doesn't move against you. Our central bank rates page shows those gaps every day. The question is whether collecting them actually pays once the exchange-rate moves are counted.
| Currencies | US dollar, euro, pound, yen, Aussie, Canadian, Swiss franc, Kiwi |
| Each month-end | Buy the three with the highest policy rates, sell the three lowest, equal amounts |
| What counts | Exchange-rate moves plus the interest earned or paid every day |
| Costs | 0.02% on every change of position (about two pips) |
| Retail version | Also takes 1% a year off the interest, roughly what a broker's swap mark-up costs |
This is the textbook "G10 carry" strategy that academic studies and fund managers use as the benchmark.
Carry has two parts, and they pull in opposite directions.
The interest is real and it's reliable: it came in steadily. But the high-yielding currencies, on average, lost some of their value against the low-yielders, giving back 1.2% a year of the 2.7% collected. What's left is small. And once a typical swap mark-up is taken off, a retail trader running the same strategy would have lost money.
Main rule, after costs, before any swap mark-up.
Carry is famous for small, steady gains followed by sudden crashes. In 2008 it lost 25%, then recovered 20% in 2009. When markets panic, everyone unwinds the same trades at once: the high-yielders get sold and the yen and Swiss franc get bought.
| Oct 2008 | −13.8% |
| Jan 2015 | −7.5% |
| May 2010 | −7.4% |
A month like the worst one here wipes out years of interest.
| Currency | Time long · time short |
| Kiwi dollar | 91% · 0% |
| Aussie dollar | 77% · 4% |
| Pound | 37% · 0% |
| Canadian dollar | 36% · 6% |
| US dollar | 43% · 33% |
| Euro | 16% · 63% |
| Swiss franc | 0% · 94% |
| Yen | 0% · 100% |
Right now the rule would be long US dollar, Pound, Aussie dollar, and short Yen, Canadian dollar, Swiss franc.
Buying just the single highest-yielder against the lowest, or two against two, and the trade retail traders know best: long AUD/JPY and never let go.
| Version | Yearly return | Retail version | Sharpe | Worst drawdown | Sharpe by half |
|---|---|---|---|---|---|
| Top 1 v bottom 1 | +3.39% | +1.39% | +0.23 | -52% | +0.38 / +0.03 |
| Top 2 v bottom 2 | +3.50% | +1.50% | +0.30 | -48% | +0.38 / +0.20 |
| Top 3 v bottom 3 (main rule) | +1.49% | −0.51% | +0.17 | -36% | +0.21 / +0.12 |
| AUD/JPY, always long | +5.49% | +4.49% | +0.35 | -45% | +0.39 / +0.32 |
AUD/JPY looks best at +5.5% a year, but three warnings. It's the famous carry pair precisely because it worked, so choosing it today is hindsight. About 2.5% a year of that came from the yen's long slide rather than interest, which is luck of timing, not carry. And it fell 45% at its worst, including 21% in Oct 2008 alone.