Interest rate differentials between major central banks are back in the spotlight. After several months of volatility in which the dollar called the shots, traders are once again borrowing in low-interest-rate currencies to invest in high-interest-rate currencies. The classic carry trade is back in action. 📊
🔍 What’s happening?
The Fed has kept rates steady in recent months. This pause is giving traders a chance to recalculate and bring back carry trade strategies—a technique that involves borrowing in a low-yield currency to invest in a higher-yielding one.
With the dollar settling down and rates remaining frozen, yield spreads between currency zones are becoming attractive again. The Japanese yen and the Swiss franc, traditionally the favorite borrowing currencies, are regaining their role as the starting point for these trades.
💡 Why does this matter?
When carry trades become dominant again, currency pairs move differently. The USD/JPY, currently at 159.1347, is benefiting from this massive rate differential between the Fed and the Bank of Japan. The same logic applies to the AUD/USD at 0.7130, where the Australian dollar is attracting capital flows thanks to higher rates.
For you as a forex trader, this changes your analysis framework. Macro fundamentals (inflation, growth) take a back seat. What matters now is the yield spread and the perceived stability of that spread. If a central bank moves its rates unexpectedly, the abrupt unwinding of these positions can trigger sharp price swings.
📊 Our view
We are clearly in a phase where the carry trade will set the pace. Capital flows are repositioning en masse.
Our analysis: as long as the Fed holds steady and the Bank of Japan maintains its ultra-accommodative policy, USD/JPY remains structurally bullish. The same applies to currencies from high-yield countries such as the Australian dollar or the British pound against the yen. In Europe, the situation is more nuanced. The ECB is navigating between residual inflation and sluggish growth, which limits the euro’s appeal in these strategies. EUR/USD at 1.1603 therefore remains range-bound as long as this balance persists. For the French trader, this opens up clear opportunities on exotic pairs (AUD/JPY, NZD/JPY) if you can manage the risk of a sudden reversal. The carry trade is profitable until it blows up.
We expect this trend to continue at least until summer. For French traders: favor long positions on high-yield currencies against the yen, but set tight stops in case of an unexpected macro shock.
✅ Key takeaway
- Carry trades are regaining momentum following the stabilization of Fed rates
- USD/JPY and yen pairs are benefiting from massive yield spreads
- Major risk: a sudden unwinding if a central bank surprises the market
What do you think? Is the carry trade truly back for the long haul, or just a temporary window before the next volatility crisis?
🔎 See also
To learn more, check out all our Forex analyses on ActuTrading Forex 📈
Source: Financial Press
