What effect does inflation have on the carry trade?

Beginner Questions
1

Hi everybody!

I wanted to start doing carry trading, but I’m not sure how to account for inflation of each of the currencies. Do I simply subtract it from the interest rate? OR does it even matter so long as the trade is going my way? I have no idea…

I’m trading AUD and NZD with low interest currencies like EUR, CHF, and JPY but there are even larger interest rates like ZAR and BRL. For instance, recently BRL has had an interest rate of 13.75% but an inflation rate of 7%.
Also, where do you get the most reliable numbers on inflation and interest rates?

Thanks lots!

2

Inflation plays no direct part in your returns from trading. It impacts how exchange rates move in that it’s related to interest rates and currency valuations. You only need to worry about it directly when it comes to the money in your trading account and its purchasing power.