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Carry trade interest rate - fxcm australia

Discussion in 'Beginners Bootcamp' started by bdj, Oct 30, 2009.

  1. bdj

    bdj Recruit

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    Hi, i'm quite new to this carry trade business. is it just a simple matter of buying into a currency pair with a high yielding currency such as AUD (against, say, the USD)? and keep earning interest (assuming, of course, that the exchange rate itself doesn't fall too much and therefore wipe out the interest earned).

    if this is the case, it sounds like all i need to do is to buy AUD/USD when the pair dips to a strong support level, and maintain such an open position for as long as the bull trend continues, is that correct?

    another question is about the interest rate. I thought the IR differential between AUD and USD offers the largest earning potential, but the funny thing is that, if i buy a mini lot (10000) of AUD/USD, the interest earned is 0.57, yet if i sell the same lot, the interest charged to me is 1.27. I dont really understand why there is such a large difference. What's even more interesting is that the interest earned on selling GBP/AUD is higher at 0.82, but even though the interest of GBP is higher than the USD.

    please see the attached screenshot to see what i mean here.

    Any advice on why is that so?
     

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    #1 bdj, Oct 30, 2009
    Last edited: Oct 30, 2009
  2. Jason Rogers

    Jason Rogers FXCM Representative

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    Hi bdj,

    The GBP/AUD rollover amounts are larger than AUD/USD due to the exchange rate. The same thing happened with GBP/JPY and NZD/JPY back when the GBP was a popular carry trade currency. NZD had a larger interest rate differential with JPY than GBP with JPY, yet the rollover amounts were higher with GBP/JPY.

    Second, the rollovers between buying and selling will be different as well because there is a spread between the price you can borrow at and the price you can invest at. As expectations on interest rates change and there is more uncertainty in the market (ie. australia possibly raising rates further) banks will start to price in that information into interest rates available in the actual market as well.
     
  3. bdj

    bdj Recruit

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    Thanks Jason, now i have a rough idea of why this happens, still not too sure about the nitty gritty of how these rollovers are calculated, but at least it's not fxcm doing anything sneaky under the covers.
     

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