What is a Negative Carry Pair
A negative carry pair is a foreign exchange (FX) trading strategy with the holding of a long position on a low-interest currency and a short position on high-interest money. Because there is a cost to maintaining the long position until the expiration, it is considered negative. A negative carry implies that the futures price is higher than the current spot price for the long position holding of the pair.
A negative carry pair is the opposite of a positive carry.
BREAKING DOWN Negative Carry Pair
Negative carry pair is a forex currency trading strategy. A currency pair is the standard method for quotation and pricing trades in the forex market. The value of a currency is a rate determined by its comparison to another currency. However, the currency pair itself is a unit that is a single instrument. Using this strategy, the trader will buy a long position on a currency with a low-interest rate and pair that money with a short position for a country which has a high-interest rate.
The trader will have cash obligations for the short position, higher interest, currency then the profit from the long position, lower interest currency. This approach shows the trader is betting on volatility in the interest rates of the two countries. A trader will go long on the country with a lower interest rate if they believe that currency will suddenly rise.
For countries with high short-term interest rates, the cost of the negative carry on a low-yielding reserve can be severe. When you borrow money in a currency of the higher interest rates and then invest in the lower interest currency, you create a negative carry pair. The trader is hoping for the money with the higher interest rate to decline which will produce a profit for the trade. Llarg, institutional traders and market makers mostly use this strategy.
Example of a Negative Carry Pair
For example, a trader may hold the USD/EGP currency pair. Here, the trader is long the USD which has the lower interest rate at 1-percent per year. They are short the EGP which has a higher interest rate of 8.5% per year. If rates stay as they are, the trader will have a carrying cost of 7.5%. At the close of trading, the trader will rollover the position in hopes of volatility in the currency exchange the next day. If no change in the market happens, the trader can either abandon the option and forgo potential future returns created by interest rate volatility, or sell EGP and incur the cost of borrowing the currency at 8.5 percent and lending U.S. dollars at 1 percent.