Interest Rate Differentials & Carry Trades

Trading Discussion News and Economy
1

Hi,
I have a few questions to anyone who can answer :slight_smile:

With respect to interest rate differentials, I understand that’s the difference between the interest rate of two currencies…right?

So I tried googling to find a good source of what the current interest rates of the major banks are. I found this page on FXStreet.com:

World Interest Rates Table
Major Central Banks Overview

Central Bank                  Next Meeting      Last Change       Current Interest Rate 

Bank of Canada                    Dec 07 2010    Sep 08 2010             1% 
Bank of England                   Dec 09 2010    Mar 05 2009             0.5% 
Bank of Japan                     Dec 21 2010    Dec 19 2008            0.1% 
European Central Bank             Dec 02 2010    May 07 2009            1% 
Federal Reserve                   Dec 14 2010    Dec 16 2008            0.25% 
Swiss National Bank               Dec 16 2010    Mar 12 2009            0.25% 
The Reserve Bank of Australia     Dec 07 2010    Nov 02 2010           4.75%

Ok so I’m guessing that for carry trade sake, ideally one would want to trade a pair with AUD in it since it has the highest interest rate? For example long trades on AUDJPY would earn 4.65% of interest?..and short trades would have to pay 4.65%?

Also is GBP the Bank of England, and the EUR the Eurpean Central Bank?

Thanks :slight_smile:

2

First, to answer your last questions: Yes, it’s the Bank of England for GBP and the European Central Bank (ECB) for the EUR.

Now, it must be noted that the table you’ve presented is of the central bank rates (for example, in the US it’s the Federal Funds rate target) not the actual overnight market rates as they trade. There can be significant differences at times. You should check with your broker to see what the actual current rates are they are working from.

As for the basic carry trade idea, you’re spot on. Got long the high interest rate currency and short the low interest rate one.

3

Thanks :slight_smile:

Now I just have to figure out if going long the AUDUSD or AUDJPY on a longer term basis would be/is still a good thing to do at some point.

4

Looking at the AUDJPY, prior support around 80.50 looks like it would have been a good place to go long for a longer term trade in case it decides to continue ranging and head back up to the upper 82 area.

If one had done that several hours ago when price was there, they could have moved their stop to b/e by now, and now just leave it open for as long it takes to either get back up there or stop out risk free…either way one would at least earn some free interest…well as long as it didn’t stop out before rollover time first…lol

AUDJPY looks like the better choice over AUDUSD due to the USD looking stronger than the JPY at the moment.

I hope this is a typical starting point for figuring this out and I’m sure there are other fundamental things to factor in but…babysteps :smiley:

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