Why Currency Carry Trades Can Unwind During Risk-Off Sessions
Interest-rate differentials may attract yield-seeking capital until volatility and funding pressure change the equation.
A carry trade generally involves borrowing or funding in a lower-yielding currency and holding exposure to a higher-yielding one. The return is not just the difference in stated interest rates. Exchange-rate movements, hedging arrangements, transaction costs and changing funding conditions can dominate the outcome.
When market stress rises, leveraged investors may reduce positions at the same time. That can strengthen funding currencies and weaken high-yielding exposures even before policy rates have changed. Liquidity and positioning therefore matter alongside economic fundamentals.
Look at real funding costs, forward points and potential exchange-rate losses over the relevant horizon. A currency offering higher interest can still deliver a negative total return. The BIS documentation explains the scale and structure of the FX derivatives market but does not promise profits from any carry strategy.
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