Carry Trade: The Interest Gap, and the Week in August 2024 That Erased Years of It
A carry trade borrows in a currency with a low interest rate and holds one with a higher rate, aiming to keep the difference between the two. The return is the interest gap plus or minus whatever the exchange rate does, and the exchange rate usually matters more.
A carry trade looks like the simplest idea in currency markets: borrow where money is cheap, hold it where money pays, keep the difference. The interest side is real and easy to calculate. The risk is on the other side, in the exchange rate, and it tends to arrive all at once. This page sets out the interest gap from the central banks’ own pages, then measures what happened to the best-known version of the trade, borrowing yen, in the summer of 2024.
How it works
Two currencies, two interest rates. Holding a currency means earning roughly its short-term interest rate. Borrowing one means paying roughly its rate. A carry trader borrows the low-rate currency, converts it, and holds the high-rate one.
The income is the difference, earned every day the position stays open. In the retail forex market this arrives as the nightly swap or rollover credit, after the broker’s own margin. The swap and carry calculator works out that figure from the two rates.
Where the risk sits
The exchange rate decides the result. If the held currency falls against the borrowed one, the loss comes straight off the interest earned. The gap is a few percent a year; exchange rates can move that much in days. That is currency risk, and in a carry trade it is the main exposure, not a side effect.
Leverage enlarges both parts. Carry is earned on the full position, so borrowing more multiplies the income. It multiplies an adverse move in exactly the same proportion.
Why the yen
For years the Bank of Japan held its rate near zero while others rose. Its 19 Mar 2024 statement set the overnight call rate at around 0 to 0.1%. The Federal Reserve’s target range had been 5.25% to 5.50% since 27 Jul 2023. Borrowing yen to hold dollars earned close to the whole of that gap.
The Australian dollar was the other classic partner. The Reserve Bank of Australia’s cash rate target was 4.35% through mid-2024, held at both its 18 Jun and 6 Aug 2024 meetings.
Then the yen side moved. On 31 Jul 2024 the Bank of Japan raised its guideline to around 0.25%, effective the next day. That left the US-Japan gap at 5.00 to 5.25 points (the Fed’s range less 0.25%) and the Australia-Japan gap at 4.10 points.
The years before had rewarded the trade twice. Besides the interest, the yen kept weakening. USD/JPY rose from a daily low of 102.59 on 6 Jan 2021 to a high of 161.94 on 3 Jul 2024, a rise of 57.9%, and AUD/JPY from its 2021 low of 77.91 on 20 Aug 2021 to 109.36 on 11 Jul 2024, a rise of 40.4%.
A worked example
A hypothetical position: $20,000 of US dollars held against borrowed yen, at the 5.00-point gap left by the Bank of Japan’s July 2024 increase, ignoring broker spreads and swap margins.
- A year of carry: $20,000 x 5.00% = $1,000, or about $2.74 a day.
- The exchange rate then falls 12.5%, the move USD/JPY made from its July high to its low on 5 Aug 2024. On $20,000 that is a loss of $2,500.
- $2,500 is two and a half years of the $1,000 annual carry, lost in about a month.
- With leverage the proportions stay the same while the dollar amounts grow: at five times, $100,000 of exposure earns $5,000 a year and loses $12,500 on the same move.
The original data
The data: daily highs and lows for USD/JPY and AUD/JPY and daily closes for Japan’s Nikkei 225, from Yahoo Finance, and the policy rates from each central bank’s own page, all read on 25 Sep 2026. Yahoo’s daily close for currency pairs equals its open on most days, so the currency figures use only highs and lows. The rates are in a CSV of the policy rates.
USD/JPY. Its highest point in the summer of 2024 was 161.94 on 3 Jul. On 5 Aug it touched 141.70, the lowest level between June and the end of August, 12.5% below the July high. At a gap of 5.00 to 5.25 points, that fall equals 2.4 to 2.5 years of carry.
AUD/JPY. It peaked at 109.36 on 11 Jul 2024 and touched 90.37 on 5 Aug, a fall of 17.4%. At the 4.10 point gap, that is 4.2 years of carry.
The Nikkei 225 on the same days. It closed at a peak of 42,224.02 on 11 Jul 2024, at 35,909.70 on Friday 2 Aug, and at 31,458.42 on Monday 5 Aug: 12.4% down in one session and 25.5% below the July close. The next day it closed at 34,675.46, up 10.2%.
Set against the income, the size of the move is the point. USD/JPY took 33 days to go from its high to its low, and AUD/JPY took 25. A trade that had paid 5.00 to 5.25 points a year gave back about two and a half years of it in 33 days, and the Australian version gave back about four. The Bank for International Settlements titled its 27 Aug 2024 bulletin on those weeks a carry trade unwind: positions built slowly over years, closed together in days. The price data shows the speed; it cannot show who was closing what. The figures are in a CSV of the 2024 move.
Where the gap stood on 25 Sep 2026. The Fed’s range was 3.75% to 4.00%, in effect from 17 Sep 2026. The Bank of Japan’s guideline was around 1.25%, decided on 18 Sep 2026 and effective from 24 Sep. The RBA’s target was 4.35%, left unchanged at its 11 Aug 2026 meeting. That puts the US-Japan gap at 2.50 to 2.75 points and the Australia-Japan gap at 3.10, both narrower than in July 2024. USD/JPY traded between 156.93 and 158.86 on 25 Sep 2026. None of this says which way the pair goes next.
When it fails
When the low-rate central bank moves. The yen trade depended on the Bank of Japan staying near zero. Its rate went from around 0 to 0.1% in March 2024 to around 1.25% in September 2026.
When everyone holds the same trade. A crowded position has one exit. The 5 Aug 2024 lows show what a shared exit looks like in the price.
When carry is mistaken for yield. The interest is payment for holding exchange-rate risk. The USD/JPY page covers the other forces that move the pair.
When the position is leveraged to make the carry worthwhile. A 5.00 point gap on borrowed money looks large as a return on margin. A 12.5% move is also large as a loss on margin, and at eight times leverage it is the whole deposit.
When broker swap rates are assumed to match central bank rates. The credit actually paid is set by the broker and is usually smaller than the gap between policy rates.
Related
The USD/JPY page covers the pair at the center of the yen trade, and interest rate explains the rates that create the gap. Currency risk is the exposure a carry trade takes on, and the swap and carry calculator turns any two rates into a nightly figure.
I count carry as a small daily credit and the exchange rate as the real position. Before I hold one, I work out how many years of interest a normal bad month in the pair would cost, and size so that month is survivable.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.