Carry Trades, Rollovers and Interest Rates and How They Affect the Forex Markets
Carry trades have always made use of the rollover practices in Forex trading for many years. In fact this has been a practice by means of which traders have been making additional profits for the last 25 years. However, things have been changing in the policies and practices deployed by central banks due to the economic scenario.
With the kind of volatility that the markets have seen in the last few years, central banks have moved together to reduce the interbank lending interest rate. There has also been a fair amount of capital that has been added into the banking system to ensure higher levels of safety. While this has resulted in easier lending and borrowing between banks, it has also reduced the interest that traders can get when they use carry trades and rollovers.
How is a Carry Trade Performed?
Carry trade is a practice in which a high yielding currency is bought while one that is not high yielding in comparison is sold. If the exchange rate between these two currencies remains the same, the trader can gain the extra interest that is available on the high yielding currency. Due to the many changes that have been introduced in central banks these days, this practice does not yield great profits any more. In fact there are times when the trader is left with a negative balance due to the spreads that are charged by Forex brokers.
Details About Rollovers You Need to Know
A rollover is a trade that is carried forward to the next trading day. Some people are confused about the manner in which rollovers are calculated because the Forex markets are practically open 24 hours a day for the 5 days that they operate.
A rollover is possible as long as the position that you are looking at is open at 5pm or before based on the local time. For the United States of America, the time is governed by the time in New York. So if you book a trade before 5pm in New York, you can ensure rollover for that evening. However, if the position opens after 5pm the trade can only be taken into rollover the next day. For trades that are made exactly at 5pm, the details can be seen in the trading account after about an hour.
Banks manage rollovers differently on weekends and holidays. Since the banks are closed on weekends and national holidays, there is no rollover that is charged even though interest is paid. However, there are two extra rollovers that are booked every Wednesday to account for the weekend. This is why the rollover on Wednesday is three times higher on Wednesday as compared to Thursday or Tuesday. The same principle is followed on national holidays too. Extra rollover is charged a couple of days before the national holiday. But this is not done globally since national holidays differ from country to country. For example, since 4th July is a national holiday due to Independence Day in the US, the extra rollover is charged on all currency pairs that include the US Dollar a couple of days before the 4th of July.