Carry Trade
The carry trade is a long-standing macro strategy that involves borrowing in a low-interest-rate currency and investing in a high-interest-rate currency. The return is the difference between the yield earned and the cost of borrowing, adjusted for foreign-exchange movement.
How it works
Borrow in a currency where the cost of borrowing is low. This is your funding currency. Once borrowed, you owe interest on this funding currency.
Convert the borrowed amount into currency whose markets offer high yields. This is your target currency. High-yield markets are typically found in countries with higher central-bank interest rates, such as emerging markets.
Invest the new currency in a yield-bearing instrument. Deploy the target currency into a high-yield asset, such as a money market fund. The return is the difference between the yield earned and the cost of borrowing, adjusted for foreign-exchange movement.
How Brix enables carry trade
Brix enables onchain carry strategies through several complementary mechanisms:
Global market access via stablecoins: Emerging-market stablecoins allow users to enter and hold foreign currency exposure globally, without local bank accounts or FX infrastructure.
Yield exposure through tokenized assets: Tokenized, yield-bearing emerging-market assets provide direct access to local interest rates and high-yield instruments.
DeFi partnerships and integrations: Through partnerships and integrations with decentralized exchanges and lending protocols, these assets can be swapped, borrowed against, looped, or paired within DeFi.
Risks
Carry trades can be profitable, but they are not risk-free. Returns depend on a combination of yield, FX behavior, and market stability, and unfavorable shifts in any of these components can significantly change expected outcomes. While the mechanics appear straightforward, the strategy carries meaningful risks that can materially alter outcomes.
Foreign-exchange (FX) risk
FX risk the dominant risk variable. Even when the target currency offers very high nominal yields, those returns are realized in local terms. If the target currency depreciates faster than the yield accrues, the strategy can generate negative returns when measured in the funding currency.
Interest-rate risk
Changes in central-bank policy, either in the funding currency or target currency, can compress or eliminate the interest-rate differential that makes the trade attractive. Sudden policy shifts, interventions, or capital-flow restrictions can reduce yields or raise borrowing costs with little notice.
Liquidity and convertibility risk
Exiting a carry trade requires converting the target currency back into the funding currency. Periods of market stress may reduce liquidity, widen FX spreads, or create delays in settlement, making it more expensive or slower to unwind positions.
Political and regulatory risk
Political and regulatory risk is inherent in emerging markets, where political transitions, capital controls, and regulatory actions can disrupt the underlying yield instruments or limit currency conversion.
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