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🔁 CARRY TRADE MECHANICS — HOW INTEREST RATE GAPS CREATE FX FLOWS
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💡 THE CORE IDEA
Forex isn’t only about direction.
It’s about yield.
When traders borrow a low-yield currency and buy a high-yield one, they earn the interest rate difference every day.
This is the carry trade — and it drives massive, persistent FX flows.
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📊 WHAT IS A CARRY TRADE?
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A carry trade involves:
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Selling (borrowing) a low-interest-rate currency
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Buying a high-interest-rate currency
Profit sources:
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Daily interest (swap/rollover)
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Potential price appreciation
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⚙️ HOW THE MECHANICS WORK
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Example:
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JPY interest rate: ~0%
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AUD interest rate: 4%
Trade:
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Sell JPY
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Buy AUD
Result:
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You earn ~4% annualized interest
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Plus any AUD appreciation
This trade stays attractive as long as the rate gap exists.
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⚠️ WHY CARRY TRADES MOVE CURRENCIES
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1️⃣ Constant Demand
Carry traders must keep buying the high-yield currency → persistent upward pressure.
2️⃣ Trend Reinforcement
As price rises, more carry traders join → trend accelerates.
3️⃣ Capital Scale
Carry trades are favored by hedge funds and institutions → large, slow, powerful flows.
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📉 WHEN CARRY TRADES UNWIND
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Carry trades collapse during risk-off events:
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Market panic
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Financial crises
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Sudden volatility spikes
Traders rush to exit → violent reversals.
Example:
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AUDJPY collapses during global risk-off
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JPY strengthens aggressively as carry trades unwind
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📈 REAL-WORLD EXAMPLES
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🇯🇵 JPY
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Classic funding currency
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Low rates for decades
→ Frequently sold in carry trades
🇨🇭 CHF
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Also used as funding currency
→ Strengthens sharply during risk-off
🇦🇺 AUD / 🇳🇿 NZD
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Popular carry targets
→ Strong in risk-on, weak in risk-off
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⚙️ PRO TIP — WATCH VOLATILITY
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Carry trades survive on low volatility.
Track:
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VIX index
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Sudden equity sell-offs
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Central bank shock events
Rising volatility = carry trade danger zone.
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🚀 TAKEAWAY
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Carry trades explain why some FX trends last forever —
and why they crash brutally.
As long as rate gaps stay wide and volatility stays low,
carry flows dominate price.
In forex, yield attracts capital…
until fear sends it running home.
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📢 JOIN MY MQL5 CHANNEL FOR MORE FOREX FUNDAMENTALS AND REAL-WORLD TRADING INSIGHTS:
👉 https://www.mql5.com/en/channels/issam_kassas
