Interest Rate Differentials & Carry Trades 📊💱 What’s at play? Carry trades involve borrowing in a currency with low interest rates and investing in one offering higher yields. The profit comes from the interest rate differential – commonly called the “carry”. Key Drivers Today U.S. Federal Reserve policy: The Fed’s benchmark rate is currently 4.25–4.50%. Markets are pricing in a rate cut in September, with some expecting a 50 bps move as inflation cools and labour market data weakens. This is fuelling renewed interest in emerging market carry trades. Latin America’s allure: The Mexican peso (policy rate 7.75%) and Brazilian real (15.00%) stand out for their high yields compared to U.S. rates. The peso has strengthened notably amid easing trade tensions, making it especially attractive for carry strategies. Japan’s cautious stance: The Bank of Japan holds rates at 0.50%, but expectations of a slightly narrower U.S.–Japan rate gap are growing. Bank of England’s easing: The BoE recently cut rates to 4.00%, aiming to support growth while inflation pressures remain. This shift is altering carry trade dynamics in Europe. Opportunities & Risks in 2025 Rewards: High-yield currencies like the real and peso can deliver substantial carry income amid expected U.S. rate cuts. The yen remains popular as a funding currency due to its low rates and relative stability. Risks: Sudden policy shifts or market volatility can quickly reverse currency trends, wiping out carry gains. Some emerging market currencies are already at multi-year highs, raising the risk of sharp corrections. Geopolitical and trade tensions remain a persistent threat to stability. Take Your Next Step To explore how you can capitalise on carry trade opportunities and manage currency risk, open your NordFX account here: ▶ Register now with NordFX https://account.nordfx.com/acc...