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. The 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 their rate to 6.25% over that period. Not only could you end up making a nice profit on the price appreciation of the pair, the interest rate differential between the two was 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. It is something that can make a difference in your trading philosophy.