A carry trade is a strategy in which traders borrow (short) a currency in a low interest rate country, take the proceeds from the short sale and convert it to a currency in a higher interest rate country, then invest it in the highest rated bonds and assets of that higher interest rate country.
Institutional traders do this with leverage of 100 or 300 to one. This causes important moves in the financial markets, made possible by the trillions of dollars of central bank money creation.
One of the most popular carry trades are with the Japanese Yen. Monetary stimulus in Japan makes the Yen cheaper, and the U.S. dollar stronger. That causes the U.S. bond market to rise, bond yields to decline, commodity prices to plunge, and precious metals prices to decline.<< Back to Glossary Index