A carry trade is a position that buys a higher-yielding currency against a lower-yielding one to collect the gap between their interest rates, called the carry, for as long as it stays open. On a forex CFD the carry arrives as a nightly holding credit or charge, and one bad week in the exchange rate can erase months of it.
In short
- A currency carry trade is long the higher-rate currency and short the lower-rate one. For years the Japanese yen, with rates close to zero, was the usual funding currency.
- On a CFD, the nightly holding amount is roughly position value × rate ÷ 365. With a sample 4% rate gap, one lot of USD/JPY ($100,000) carries about $10.96 a night, under 2 pips.
- The provider's own charge works against both sides, so a long earns less than the rate gap and a short pays more than it.
- USD/JPY fell 11%, from 161.73 on 10 July 2024 to 143.95 on 5 August by the Federal Reserve's daily noon rate, a slide that ended with yen carry trades unwinding.
- On CMC Funded, overnight and weekend holding is allowed and holding costs apply. Holding costs lower equity, which is what the daily loss limit measures.
What is a carry trade in forex?
A forex carry trade holds a currency pair in the direction that earns the interest gap. Buy the higher-rate currency against the lower-rate one and you are, in effect, lending the first and borrowing the second, so you collect the difference each night. Sell the pair and you pay it.
Banks and funds run the same idea with deposits, bonds and forwards. The low-rate side is the funding currency and the high-rate side is the target currency.
The carry only adds up if the exchange rate holds still or moves your way. Textbook theory (uncovered interest parity) says the higher-yielding currency should fall by roughly the rate gap over time, cancelling the carry. A carry trader is betting it will not fall that much while the position is open, and when that bet fails, the price loss is usually far larger than the interest earned.
What is the yen carry trade?
The yen carry trade borrows Japanese yen, or sells it through a currency pair, to hold higher-yielding currencies or assets. Japanese short-term rates sat close to zero for years, so the yen became the most common funding currency. On a chart, the trade is a long position in USD/JPY, AUD/JPY or a similar yen cross.
Yen borrowing also paid for foreign shares and bonds, so when the yen rises fast, some holders sell those assets to buy yen back. The Bank for International Settlements (BIS) described that pattern on 5 August 2024: carry trades came under pressure, the yen rose sharply and Japanese shares sold off. The Swiss franc has played the same funding role at times, and the funding currency changes as central banks move rates.
How do holding costs and credits work on a CFD?
A CFD position kept open past the daily rollover is charged, or sometimes credited, a holding amount based on its full position value. On a currency pair, the rate reflects the interest gap between the two currencies, adjusted by the provider's own charge. On indices and shares, it is a financing rate on the position's value.
The nightly amount is roughly: position value × (rate gap ± provider charge) ÷ 365. Some markets divide by 360, and providers build the rate in different ways, often from interbank rates or forward points. Because the charge always works against you, the long and the short on one pair are not mirror images. One side may earn a small credit while the other pays a larger cost, or both may pay.
On many platforms, one weekday's rollover books three nights at once to cover the weekend, usually midweek for forex. That three-night charge lands in a single day, which matters when your daily loss limit counts every cost.
A carry trade example in numbers
On one lot of USD/JPY, a 4% rate gap is worth about $10.96 a night, roughly 1.6 pips, while the pair can move hundreds of pips in a day. The rates below are samples chosen to keep the arithmetic simple. They are not current market rates or CMC Funded rates.
- You buy 1 standard lot of USD/JPY at 150.00. The base currency is the US dollar, so the position is worth $100,000.
- With a sample US rate of 4.50% and a Japanese rate of 0.50%, the gap is 4.00%. Gross carry is $100,000 × 4.00% ÷ 365 = $10.96 a night.
- Add a sample provider charge of 2.50%. The long earns 4.00% minus 2.50% = 1.50%, or $4.11 a night. A short pays 4.00% plus 2.50% = 6.50%, or $17.81 a night.
- One pip on 1 lot of USD/JPY is ¥1,000, which is $6.67 at 150.00, so a night's gross carry is about 1.6 pips.
| 1 lot of USD/JPY | Rate applied | Per night | 30 nights | 30 nights in pips |
|---|---|---|---|---|
| Gross rate gap | 4.00% | $10.96 | $328.77 | 49.3 |
| Long, after the sample charge | 1.50% | $4.11 | $123.29 | 18.5 |
| Short, after the sample charge | 6.50% | $17.81 | $534.25 | 80.1 |
Between the Federal Reserve's noon rates on 10 July and 5 August 2024, USD/JPY fell 17.78 yen, or 1,778 pips. A 1 lot long opened at 161.73 would have been about $12,350 down by 5 August, after earning about $107 of carry over those 26 nights at the sample long rate.
Why do carry trades unwind so sharply?
Carry trades unwind sharply because many leveraged traders hold the same position, and the carry is small next to a normal price move. Once the funding currency starts to rise, losses outgrow months of carry. Stop-losses and margin calls force traders to close, and closing means buying back the funding currency, which pushes it higher still.
A carry trade unwind usually starts with a narrowing rate gap, when the funding currency's central bank raises rates or the target currency's is expected to cut. A jump in volatility can start one too, because the nightly carry no longer pays for the risk of holding. In both cases, the reason to stay in shrinks just as the price turns against the position.
The result is a lopsided pattern: small credits that build slowly, then occasional large losses that arrive together. The BIS described the August 2024 swings as volatility made worse by deleveraging and higher margin requirements.
What happened in the 2024 yen carry trade unwind?
In early August 2024, yen-funded carry trades unwound and the yen rose sharply, after a month in which USD/JPY had already been falling. By the Federal Reserve's daily noon rate, USD/JPY dropped 11%, from 161.73 on 10 July to 143.95 on 5 August, and Japan's TOPIX share index posted double-digit losses on 5 August.
| Date | What happened |
|---|---|
| 10 July 2024 | USD/JPY at 161.73, its highest noon rate that month |
| 31 July 2024 | The Bank of Japan raised its short-term rate guideline to around 0.25%, effective 1 August, and said it would keep raising rates if its outlook held. USD/JPY at 150.38 |
| 2 August 2024 | A disappointing US labour market report. The two-year US Treasury yield fell 26 basis points, and the USD/JPY noon rate fell 308 pips from the day before, to 146.98 |
| 5 August 2024 | The yen rose further. TOPIX posted double-digit losses and its banks index had the worst one-day loss in its 40-year history. The VIX briefly passed 60 before the US open and closed under 40. USD/JPY at 143.95 |
| The following days | Markets steadied and, the BIS noted, erased their losses within days. USD/JPY was at 148.13 on 16 August |
Both ends of the rate gap moved at once: Japan raised rates, and the weak US data pulled down expected US rates. A BIS Bulletin on 27 August 2024 put estimates of yen carry positions going into the event at a rough middle ballpark of ¥40 trillion ($250 billion).
Sources: Bank of Japan statement, 31 July 2024; BIS Quarterly Review, "Carry off, carry on", 16 September 2024; BIS Bulletin 90; Federal Reserve H.10 yen rates on FRED.
How carry and holding costs work on CMC Funded
Overnight and weekend holding is allowed on CMC Funded, and holding costs apply. Simulated trades carry trading costs, as they would on a live account: a commission when a trade opens and when it closes, a price markup on some symbols, and holding costs on positions kept overnight.
Rates differ by symbol and direction, and the platform shows the holding rate for each symbol. Check it before you hold overnight, and measure the cost in R, the amount you risk per trade.
Worked example on a $10,000 Classic account
- You risk 1% per trade, so 1R is $100. The daily loss limit is $500 and the maximum loss floor is $9,000.
- You buy USD/JPY at 150.00 with a 100-pip stop. At $6.67 per pip per lot, $1 a pip is 0.15 lots, a position worth $15,000.
- At the sample rates above, which are not CMC Funded rates, the position carries $1.64 a night gross. After the sample charge, a long would earn $0.62 a night if credits were paid, and a short pays $2.67.
- Over 20 nights, that is $12.33 (0.12R) for the long and $53.42 (0.53R) of cost for the short. A short that reaches a +2R target after 20 nights nets about +1.47R.
- Leverage changes the margin you put up, not the holding cost, which is charged on the full $15,000. Higher leverage magnifies both gains and losses.
Apply the same size to the 2024 move. Bought at 161.73 on 10 July 2024 without a stop, 0.15 lots would have been $1,132 down by 31 July, past the $1,000 maximum loss, and $1,853 down by 5 August. With a 100-pip stop at 160.73, the trade would have closed near -1R, since the noon rate on 11 July was already 158.58.
There is no time limit on Classic or Direct, but carry alone is slow: at the sample 4% gross rate, $15,000 earns about $600 a year, so it would take about 16 months to cover the $800 Phase 1 target. The daily loss limit counts open positions and is measured on equity, so a gap against you at the open uses it straight away, and reaching it ends the account. Record every holding cost in your trading journal template so your results in R include it.
Common mistakes
- Counting the gross rate gap as income. The provider's charge comes off the long side and is added to the short side, so check the rate for your direction.
- Sizing from the carry, or holding without a stop because the trade pays you to wait. A night of carry on 1 lot of USD/JPY was under 2 pips in the example, while the noon rate moved 308 pips from 1 to 2 August 2024. Size from your stop and keep it in place.
- Forgetting the weekend charge. At the sample short rate, three nights on 1 lot of USD/JPY cost $53.42 in one day, about 11% of the $500 daily limit on a $10,000 Classic account.
- Ignoring central bank dates. A rate decision can shrink the gap overnight, as the Bank of Japan's did on 31 July 2024.
Questions traders ask
Is a carry trade the same as arbitrage?
No. Arbitrage locks in a gain with no market risk, while a carry trade leaves the exchange rate unhedged. If you hedge the currency with a forward contract, the forward price already includes the rate gap, so the carry disappears. The carry is what you are paid for taking exchange-rate risk.
What is a reverse carry trade?
A reverse carry trade is the opposite position: long the low-yielding currency and short the high-yielding one. You pay the rate gap every night, so traders take it when they expect the funding currency to rise by more than the carry costs, as the yen did in the 2024 unwind.
Is the carry trade illegal?
No. A carry trade is an ordinary position in a currency pair or other asset, held for its interest gap, and banks, funds and individual traders all use it. Its risks are market risks: exchange-rate moves, changes in interest rates and the leverage used to hold the position.
Which currency pairs are used for carry trades?
Carry trades pair a low-yielding funding currency, historically the Japanese yen or Swiss franc, with a higher-yielding one such as the US, Australian or New Zealand dollar. Rates change with every central bank cycle, so the pair with the widest gap changes too. Check the current holding rate for the symbol before relying on it.
Next steps
The spreads and trading costs lesson shows how holding costs sit alongside commission and spread, and the leverage and margin lesson explains what leverage does to a position like the one above. The pip value calculator turns a holding cost into pips, and the rules page has the full Classic and Direct limits.
You can compare both routes and every account size on the challenges page.