Carry Trade is a Forex trading strategy based on using the difference in interest rates. This method has emerged because interest rates of Central Banks in different countries may differ significantly. So, to make some profit, it is enough to receive a loan with a low interest rate, then convert it into another currency and invest with higher returns.
Please remember that in these articles, we are trying to tell you more about the imperfectances of the fiat currencies and how people can use the Reserveum algorithmic stablecoin to solve most of the problems of the modern financial system.
Carry Trade in Action
To make money on the carry trade orders, one has to make several operations:
- Get a low-interest loan in a bank of a developed country like Japan (-0.1%), Switzerland (-0,75%) or the EU (around 0%).
- Then one should choose a developing economy with higher interest rates, in countries like Mexico (6,5%), Turkey (8%), Brazil (12,75%), etc. Convert the funds into the national currency of the chosen country.
- Put money in the bank of this county with a higher interest rate. An alternative option is buying government bonds with a high return rate.
The main challenge is to not choose a country that is soon to become a war aggressor; in other terms, it’s a win-win game.
Of course, this magical profit method is not available to everyone. Such operations are mostly processed by hedge funds and investment funds for huge amounts, which may cause serious problems in all the countries involved.
When currencies flow massively from one country to another, Central banks need to bear that in mind when they manage the refinancing rate. It is important because higher rates will attract speculative capital, therefore increasing the money supply in the country and inflation, which leads to the devaluation of the national currency.
We have already told you about the harm of high inflation in some of our articles. You can check out the article called “Structural Inflation, or Why Do US Petrol Prices Get Higher”.
Large operations with currency have always been the scourge of the economy. If not for the billions of speculative money, the inflation may be actually managed with the interest rate changes. But the human factor, especially greed, makes things more complicated; that’s why even developed economies suffer from this disbalance.
The world economy has long since formed a common space for all the countries, so a decentralised money system could be quite a logical solution. From the position of the current fiat currency, it may seem impossible. But this is what we have high-tech solutions for – to solve the unsolvable.
Here in Reserveum, we study all the mistakes and imperfectness of the classical money system to eliminate them and create a new effective currency. The carry trade opportunity, or the opportunity to make international currency speculations, is one of the problems that the economy needs to get rid of in the first place.
The ideal fair currency would be designed as an algorithmic stablecoin backed by real assets and directly connected to the production volumes. The main advantage of the Reserveum stablecoin is its decentralisation which makes it independent from unwanted influence.
The stablecoin will be managed by a smart contract that would have all of the current economy’s conditions built into it: the production volume of materials, goods, and services, the level of income of all the participants, the number of consumers and their needs, their participation in the economical system, the consumption level, etc. With all this data, the smart contract will manage to regulate the money supply volumes without inflation and therefore provide fair money distribution among the users.
According to the analysis group findings: reserveum.org