It is possible to profit by trading the currency of a country with a lower interest rate against the currency of a country with a higher interest rate. In that manner, they can essentially trade interest rate differentials. he interest rate differential is known as “carried trade” and it is possible to profit from that as well as from the movement of the currency itself. Currency crosses with a high interest rate differential are the biggest targets for this type of trade.
The AUD/JPY pair from 2002-07 is a great example of this. During the period from 2002-2007, the Bank of Japan maintained a 0% interest rate, while the Reserve Bank of Australia hiked its rate to 6.25% over that period. Not only could you end up making a nice profit on the price appreciation of the pair, but the interest rate differential between the two was also rather large. Thus, you may be able to double-dip into profitability if you are able to grab some of the appreciation of the currency pair and also enjoy carry trade offered by the interest rate differential between the two. If you trade interest rate differentials, it’s something that can make a difference in your trading philosophy.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.
