The carry trade – borrowing money in a low-interest-rate currency and investing it in a higher-interest-rate currency – has been a staple of the rand market for decades.
For example, interest rates in Japan are currently about 1.4%, while the prime lending rate in SA is 11.25% – a difference of about 9.5%.Investors would borrow in yen, convert to rands and invest in income-yielding assets in SA to capture that interest rate differential. The carry trade returns, spread over a year of trading, do not amount to much. However, what makes this attractive for traders is leverage. Even if the currency pair remains static, there is the potential to earn interest revenue. The real attraction is the ability to earn interest and make capital gains from the movement in the currency pair.A more liquid currency for the carry trade is the Australian dollar to the US dollar. Prime lending rates in Australia are currently 10.