The first port of call when carry trading forex is to identify available currency pairs with a significant difference in interest rates. Typically, these are found in cross-currency pairs; that is, any currency pair not inclusive of the U.S Dollar.
However, as always, it’s important to tread carefully here. At the time of writing, there are some countries with negative interest rates, namely Japan (-0.1%) and Switzerland (-0.75%), whilst others such as Turkey are as high as 10.75%. Though this differential may seem appealing, such high interest rates are often associated with economic instability, which can dramatically impact the value of a currency.
A successful carry trade is one that involves relatively stable currencies, so when considering interest rate differentials, you should also be looking at the historical trends of the currencies in question.
It’s also important to bear in mind that the interest rate differential according to rates set by the central banks isn’t necessarily what you’ll be offered by a broker. It may factor in its own charges, so you’ll need to look at the broker’s own interest rate differential, commonly known as the forex swap.
