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Classic Currency Carrylong the high rate, short the low one

Evidence: StrongProfessionalCarry · Cross-sectional

Borrow in a currency with a low interest rate, hold one with a high rate, and pocket the difference. Uncovered interest parity says the high-rate currency should fall by exactly enough to cancel that out. It does not — a finding so robust it has its own name, the forward premium puzzle, and so old it is now approaching fifty years of replication.

This is the purest expression of that. No chart, no indicator, no timing: rank the currencies by rate, hold the top against the bottom, rebalance monthly.

The return here comes from holding, not from being right about direction. That reverses the usual trade-off: time is on your side and volatility is against you, which is the opposite of everything else in this library.

Category
Carry · Cross-sectional
Timeframe
Monthly rebalance · positions held for months
Suitable pairs
A basket — G10 at minimum. Single-pair versions are a different and much worse strategy.
Session
Rebalance at the month-end close
Indicators / tools
Each currency's policy rate or short-term forward points · your broker's actual swap table · realised volatility for sizing

Valid setup

CY-01 · CLASSIC CURRENCY CARRY — VALID SETUP a high-rate currency against a low-rate one · the price drift is incidental — the swap is the trade LONG THE HIGH RATE 0.6105 0.6127 0.6149 0.6171 0.6193 0.6216 0.6238 MONTH 1 — swap credited every night MONTH 2 — ranking unchanged, position held MONTH 3 price drift — a bonus, not the reason POSITION OPENED at the month-end rebalance still held — closed only when the ranking changes 1 2 3 rebalance rebalance 0.6120 0.6200 ① Ranked by interest rate — no chart involved ② Rebalanced monthly; ranking unchanged, so nothing to do ③ There is no stop level on this chart, and that is deliberate ④ The return accrues nightly, not on exit ⑤ Risk is controlled by size and diversification ⑥ The danger is a crash, not a bad entry

Exact rules

Entry

  • Rank your universe by short-term interest rate at the end of each month.
  • Long the top third, short the bottom third, equal risk in each leg. Equal risk, not equal lots — volatility differs enormously across currencies.
  • Rebalance monthly. Not weekly: the rate rankings barely change and the turnover costs are real.
  • Run it on at least eight currencies. Concentrating the whole idea into one pair throws away the diversification that makes the average work.

Stop loss

  • There is no per-trade stop in the classic version, and that is the honest description of it. The risk control is diversification and size, not a level on a chart.
  • If you want a stop — and most retail accounts should — use a portfolio-level one: cut the whole book in half after a 10% drawdown. Attaching stops to individual legs turns carry into a badly-designed trend strategy.
  • Total risk 2%–4% across the whole book, not per leg.

Take profit / exit

  • No target. The position exists to collect the differential and it is closed when the ranking changes it.
  • Expect long quiet accumulation and sudden sharp giveback. That shape is the strategy, not a malfunction of it.
  • Verify your swap credits weekly. If the broker's swap does not match what the rate differential implies, the edge you are measuring is not the edge you are being paid.

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More from Carry & rates

Volatility-Filtered Carryswitch it off when the market gets loudSingle-Pair Swap Harvestthe retail version, and what it really paysRate Expectation Repricingtrade the change in the forecast, not the rate

Trading carries risk and most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade. The chart is an illustration of the rules on constructed candles — it is not a record of a trade and not a backtest.