What’s at play? Carry trades involve borrowing in a currency with low interest rates and investing in one offering higher yields. The profit comes from the interest rate differential — commonly called the “carry”.
Key Drivers Today
U.S. Federal Reserve policy: The Fed’s benchmark rate is currently 4.25–4.50%. Markets are pricing in a rate cut in September, with some expecting a 50 bps move as inflation cools and labour market data weakens. This is fuelling renewed interest in emerging market carry trades.
Latin America’s allure: The Mexican peso (policy rate 7.75%) and Brazilian real (15.00%) stand out for their high yields compared to U.S. rates. The peso has strengthened notably amid easing trade tensions, making it especially attractive for carry strategies.
Japan’s cautious stance: The Bank of Japan holds rates at 0.50%, but expectations of a slightly narrower U.S.–Japan rate gap are growing.
Bank of England’s easing: The BoE recently cut rates to 4.00%, aiming to support growth while inflation pressures remain. This shift is altering carry trade dynamics in Europe.
Opportunities & Risks in 2025
Rewards:
High-yield currencies like the real and peso can deliver substantial carry income amid expected U.S. rate cuts.
The yen remains popular as a funding currency due to its low rates and relative stability.
Risks:
Sudden policy shifts or market volatility can quickly reverse currency trends, wiping out carry gains.
Some emerging market currencies are already at multi-year highs, raising the risk of sharp corrections.
Geopolitical and trade tensions remain a persistent threat to stability.
Take Your Next Step
To explore how you can capitalise on carry trade opportunities and manage currency risk, open your NordFX account here:
Interest Rate Differentials & Carry Trades 📊💱 was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.
