The world of global finance is brimming with clever strategies, but few are as enduring—or as controversial—as the currency carry trade. In 2025, with interest rate policies diverging more than ever between major economies, Australians are finding new opportunities (and risks) in this classic trading play. So, what exactly is a currency carry trade, why is it making headlines this year, and what should you know before dipping your toes in?
What Is a Currency Carry Trade?
At its core, a currency carry trade is a strategy where investors borrow money in a currency with a low interest rate and invest in a currency offering a higher interest rate. The goal? To pocket the difference, known as the ‘carry’. For example, if the Bank of Japan keeps rates near zero while the Reserve Bank of Australia (RBA) sets rates at 4.35%, an investor might borrow in yen and invest in AUD assets, hoping to earn that juicy rate gap.
- Borrow low, lend high: The basic principle is simple, but the execution can be risky.
- Highly leveraged: Many carry trades use leverage, amplifying both gains and losses.
- Currency risk: Exchange rates can move against you, erasing profits or creating losses.
Why 2025 Is a Big Year for Carry Trades
This year, global central banks are anything but coordinated. After a series of aggressive rate hikes, the RBA has kept the official cash rate at 4.35% as of May 2025, signaling a pause to fight persistent inflation. Meanwhile, Japan’s central bank has only just nudged rates out of negative territory, keeping the yen a preferred ‘funding currency’. In contrast, the US Federal Reserve and European Central Bank are walking a tightrope, with rates steady but growth wobbly.
These conditions have created fertile ground for carry trades. Key developments in 2025 include:
- Persistently wide rate gaps: The AUD/JPY pair remains a favorite among traders, with the yield gap hovering near decade highs.
- Retail access to FX platforms: More Australians can now access global currency markets thanks to tighter ASIC regulations on leverage and improved transparency.
- Increased volatility: Geopolitical tensions and fluctuating commodity prices (especially iron ore and LNG) have made the Aussie dollar more volatile, raising both risk and reward.
Real-World Example: The AUD/JPY Carry Trade in Action
Let’s look at how a typical carry trade might work for an Australian investor in 2025:
- Borrow 1,000,000 Japanese yen at 0.1% interest.
- Convert to Australian dollars (approx. $10,000 AUD at 100 JPY/AUD).
- Deposit the funds in a high-yield Australian account or short-term bond paying 4.35%.
- Over one year, the interest earned is $435 AUD, minus minimal yen interest costs.
- If the AUD/JPY exchange rate stays stable, the profit is straightforward. But if the Aussie dollar falls sharply, currency losses can wipe out gains.
In 2025, some Australian retail traders have found success with this strategy, but others have been caught out by sudden currency swings—especially after surprise policy shifts in Tokyo or Canberra.
Risks, Rewards, and Policy Changes to Watch
Carry trades aren’t for the faint-hearted. The biggest risks are:
- Currency volatility: The AUD can move quickly on commodity news or global risk sentiment.
- Leverage limits: ASIC has maintained tighter controls on leverage for retail FX traders since 2021, capping maximum leverage at 30:1 for major currency pairs and 20:1 for minors in 2025. This reduces blow-ups but also limits profit potential.
- Central bank surprises: Sudden rate moves or interventions can trigger mass unwinding of carry trades, leading to sharp currency moves (the infamous ‘carry trade unwind’).
On the upside, successful carry trades can offer a steady stream of income, especially in a low-growth, high-rate-differential environment like 2025. Some managed funds and ETFs are even offering carry trade strategies to retail investors, though fees and complexity remain considerations.
Conclusion
The currency carry trade is back in the spotlight in 2025, fuelled by diverging interest rates and easy access to global FX markets. While the rewards can be tempting, the risks—especially from leverage and sudden currency moves—are real. For Australians looking to profit from global rate gaps, a cool head, careful risk management, and an eye on policy updates are essential.
