Swap Rates in FX Markets

As mentioned before, interest rates are quite important in FX markets. Although investors use interest rates in a variety of ways, the most notable is the carry trade.

As discussed, the carry trade uses the interest rate differential between two currencies (countries) in order to earn interest on the trade. Information on the differential (spread) between two currencies is located on our website, where the precise rates used on each trade can be found.

Nonetheless, for the majority of traders, the precise interest rate differential is not usually a consideration when they enter or exit a position, even though knowledge of whether it is positive or negative can be important. To this end, this post offers an overview of the interest rate differential between the major currency pairs, in order for traders to keep in mind whether allowing their position to go overnight would result in a loss or a profit.

The table above presents an overview of the main currency pairs and their interest rates. As can be observed, the US Dollar currently has the highest interest rate, at 2.25%, and thus has a positive interest rate differential with all 7 of the other currencies. As such, any trade where the USD is bought will result in a positive swap rate, if the position is held open overnight.

On the opposite end of the spectrum, the Swissy has a negative spread with every other currency suggesting that a trader can expect negative swap rates if he/she goes long on it. On the other hand, if someone shorts the CHF they can expect a positive swap if the position is held overnight. In contrast, going long on the Sterling will register a positive swap rates against the Euro, Yen and Swissy, while it would result in negative spread (swap) for the US Dollar, Kiwi, Loonie, and Aussie.

Naturally, a positive or a negative swap does not mean that the trade will be either successful or unsuccessful. What it simply suggests is that a trader can expect to earn (or lose) more or less depending on the interest rate spread between two currencies. In addition, given that interest rates do not change that often, a trader can use this table for future reference when it comes to trading the majors.

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Dr Nektarios Michail

Market Analyst


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