Every open forex position overnight accumulates or pays an interest charge called a swap, or rollover. For many short-term traders, swap rates are an afterthought - a small positive or negative line item on the trade history that rarely changes the conclusion about a trade's profitability. For traders who hold positions for days, weeks, or months, swap rates can be the difference between a viable strategy and one that slowly bleeds to zero even when directionally correct. And for traders who deliberately engineer positions to collect carry, swap rates are the entire point.
What Swaps Actually Are
When you hold a forex position overnight, you are effectively borrowing one currency to buy another. The swap charge reflects the interest rate differential between the two currencies in the pair. If you are long AUDUSD - meaning you hold Australian dollars and are short US dollars - and Australian interest rates are lower than US rates, you will pay the differential on the borrowed side (USD) and receive less on the held side (AUD). The net result in this scenario is a negative swap: you pay to hold the position overnight.
Conversely, if you hold a position where the currency you are long has a higher interest rate than the currency you are short, you collect a positive swap each night. This is the carry trade in its simplest form: structuring a position to earn the interest rate differential as a daily income stream, independent of (and in addition to) any directional price movement.
The actual swap rate applied by your broker is not simply the raw central bank rate differential. Brokers typically add a markup - often 0.5 to 1.5 percentage points per side - as part of their compensation for providing the position financing. This markup, along with any institutional hedging costs, means the swap you receive is always somewhat less than the theoretical maximum, and the swap you pay is always somewhat more.
Swap Rates in 2023
The aggressive rate hiking cycle that began in 2022 made carry trade dynamics more relevant than they had been in over a decade. With the US federal funds rate at 5%+ and many other major economies also at multi-year highs, the absolute magnitude of swap rates is significantly larger than it was during the 2010s when near-zero rates made carry trivial.
The most notable carry differential in 2023 remains USD/JPY. The Bank of Japan has maintained ultra-loose policy with rates near zero, while the Fed has hiked to 5%+. A long USDJPY position collects a substantial positive swap - in the range of $5-10 per lot per day depending on the broker - simply for holding the position. This explains a significant portion of the institutional demand for long USDJPY that has kept the pair elevated even as other dollar positions have been reduced.
Other pairs with notable carry differentials in the current environment include:
- USDCHF long - Swiss National Bank rates remain below Fed rates, generating positive carry for USD longs
- AUDCHF and NZDCHF long - benefiting from the Australia/NZ rate premium over Switzerland
- MXNUSD and emerging market pairs - where central banks have hiked aggressively, creating very high swap rates (accompanied by correspondingly higher volatility and political risk)
The Risk in Carry Trades
Carry trades have a well-documented asymmetry: they tend to generate steady, consistent returns during periods of low volatility and high risk appetite, and then experience sudden, large losses when market sentiment reverses sharply. The phrase "going up by the stairs and down by the lift" was coined to describe exactly this dynamic.
When risk-off conditions hit - a financial shock, a sharp deterioration in growth expectations, a major geopolitical event - carry trades are unwound simultaneously by many participants. In USDJPY's case, this means a rapid appreciation of the yen as leveraged long positions are closed en masse. The yen's role as a funding currency for global carry trades means that JPY pairs can move 3-5% in a day during deleveraging events.
Traders entering carry positions need to be clear about their time horizon and risk tolerance relative to the expected carry income. Collecting $8 per lot per day in positive swap only makes mathematical sense as a strategy if you are able to withstand the drawdown that comes when sentiment reverses. A 300-pip move against a USDJPY long position wipes out over a year of swap income at current rates.
Practical Considerations
A few operational points that matter when working with swaps:
Triple swap Wednesday. To account for the weekend (when markets are closed but interest accrues), brokers apply triple the normal swap rate on Wednesday night rollovers. This is a bookkeeping convention rather than an economic reality, but it means Wednesday's swap line on your account will be three times the usual amount - positive or negative.
Swap-free accounts. Islamic accounts are offered swap-free as a matter of religious compliance. Some brokers offer these to any client, and the alternative pricing they use (admin fees, different spread structures) may be more or less favourable depending on the pair and holding period.
Check your broker's swap tables. Swap rates are published by brokers in their contract specifications and within MetaTrader under the instrument properties. They change periodically as central bank rates change. Do not assume last month's swap rate still applies after a major central bank meeting.
Understanding swap rates turns what is usually an ignored line item into a genuine input for trade selection and holding period decisions. Whether you are engineering a carry position or simply ensuring that a multi-day swing trade is not being eroded by negative swap, this knowledge directly improves the quality of your trade management.