Seems like every pair you can hold overnight has negative (you pay interest) carry rates. I assume that is because nearly ever central bank in the world has their rates near 0, in some cases negative, and brokers are charging their own big on that for the risk. There is no carry trade anywhere right now, true? Or am I just blind.
This might be a dumb question, but are there any currencies with a positive carry?
- Thread starter Little Whale
- Start date
It only seems that way because the forex "brokers" impose such a big haircut on the carry. So if the real rate is 1% (meaning you'd pay 1% on one side and get 1% on the other) they apply a -2% haircut so it ends up -3%/-1%.
Keep in mind the carry is a bit of an illusion anyway. If the real carry was 2 pips on a given day, for example, then when it's charged/paid the pair will drop by 2 pips just like a stock going ex dividend.
Actually the only way to "certainly" get anything in the future with currency is to enter a futures or forward contract. And if you take a look at those, you'll see that the futures price exactly discounts the amount you would make in carry if you held the high interest currency.
In other words, the high interest currency tends to devalue the same amount as the amount you earn in carry. Add in the haircut from brokers and you almost certainly will not end up ahead at the end of the day. Obviously the currency will randomly fluctuate in value as well, so you have an equal chance of being ahead or behind from that, but you have the headwind of the broker haircut and the idea that you get a boost from the carry is entirely an illusion.
I did not say *not* to trade forwards.
But thanks for the addition anyways. However, if you look at the retail space where traders might not have good access to these instruments, you can trade CFDs and still earn carry. Not sure about the US to be honest, but these are easily available in Europe. Take OANDA, for instance. They'll charge negative carry if you're short the higher-interest CCY, but they'll pay positive carry if you're long that CCY. Of course, there's a spread.Also, as you mentioned yourself, while your earnings from carry (positive or negative) are almost certain ex ante for short periods such as overnight, the total return from your position is anything but certain given the fluctuations in the exchange rate. To repeat myself: This really is no arbitrage thing.
I can't confirm this for an institutional setup, but I won't say you're wrong b/c I don't know how futures are being priced by brokers in the retail space.
I guess you're talking about what you mentioned for futures above. But your statement is not entirely true as-is: If you buy a high-interest CCY, that CCY actually "tends" to depreciate *less* than the carry or even appreciate! That is why the carry trade is still employed as a popular investment strategy. It's only during risk-off scenarios that the trade falls apart spectacularly.
I agree with everything you write except for the final sentence. Earning carry is no illusion. I'm doing it via forwards every day (and in the retail space, this works with CFDs too). If you buy TRY and sell USD, for example, and at the end of the day your broker has taken the entire carry from you, get another broker! Seriously, the carry in the forward market for USD/TRY shorts is 14% p.a. as of this writing. No broker margin should be so big that it uses that kind of carry up completely.
I perhaps added too much background information and my overall point was lost. If TRY has a 14% interest rate, then in 1 year, all other factors being taken out, TRY will be worth 14% less than it is today. So you'll receive 14% interest and lose 14% of the value, a complete wash. Therefore the idea that you would profit from carry is an illusion.I did not say *not* to trade forwards.
Also, as you mentioned yourself, while your earnings from carry (positive or negative) are almost certain ex ante for short periods such as overnight, the total return from your position is anything but certain given the fluctuations in the exchange rate. To repeat myself: This really is no arbitrage thing.
I can't confirm this for an institutional setup, but I won't say you're wrong b/c I don't know how futures are being priced by brokers in the retail space.
I guess you're talking about what you mentioned for futures above. But your statement is not entirely true as-is: If you buy a high-interest CCY, that CCY actually "tends" to depreciate *less* than the carry or even appreciate! That is why the carry trade is still employed as a popular investment strategy. It's only during risk-off scenarios that the trade falls apart spectacularly.
I agree with everything you write except for the final sentence. Earning carry is no illusion. I'm doing it via forwards every day (and in the retail space, this works with CFDs too). If you buy TRY and sell USD, for example, and at the end of the day your broker has taken the entire carry from you, get another broker! Seriously, the carry in the forward market for USD/TRY shorts is 14% p.a. as of this writing. No broker margin should be so big that it uses that kind of carry up completely.
