A Currency Carry Trade is a speculative strategy that involves trading currencies from a low-yielding to a high-yielding currency. Since there’s no transaction cost and no risk of loss, it’s suitable for long positions. To execute this strategy, an investor first chooses a lower yield currency to fund his position. For example, if he’s going long US dollars against Japanese yen, he could choose to use Euros as his funding source. Then he can either sell Euros for US dollars or buy US dollars using Euros as his funding source. Once this position is established, he has enough money to buy the higher yielding currency at favorable exchange rates relative to his funding source. Once he has acquired the high-yielder, he sells his holdings at favorable rates to repay his initial funding source.Essentially, the trade is funded with an underperformance of one or more currencies. The expected gain from the strategy is based on the difference between the current value of the high-yielder and the low-yielder, as well as on interest rates. A carry trade can be profitable in certain conditions, such as when interest rates are low and when there’s an exchange rate depreciation of the lower yield currency relative to the higher yield currency.A carry trade can be profitable when interest rates are low and when there’s depreciation of the lower yield in relation to the higher yield due to inflationary pressures in countries with higher inflation such as Japan or Europe respectively in these examples where deflation would hurt these countries more since they are already suffering negative real interest rates on their government bonds due to insufficient aggregate demand in their economies worldwide: Inflation hurts debtors more than it does creditors—and governments are usually among its most indebted debtors—the more inflationary countries become by exporting commodities like oil via speculation backed by petrodollars —thus impacting all local economies worldwide —such that they end up further indebted via increased aggregate demand powered by rising prices via rising debtors' spending fueled by inflationary exporting via their own government policies promoting those same commodities via excessive international money supply growth balancing supply & demand worldwide —in addition.
