Currency Carry Trades

[fluid]

Hello all,

I currently do not trade Forex but have been wanting to learn currencies and how they are correlated with one another. I have a few questions for traders who are familiar with currencies. What is a carry trade and how exactly does it work?
Also, why are currency traded as pairs? Excuse my newbie questions but seeking for some knowledge. Thank you.

[PYenner]

These are only my impressions, not solid fact.

Institutions offer bonds, effectively in a currency pair like NZDJPY.
NZD has one of the higher interest rates and JPY one of the lowest.
They rely on accumulating interest payments but appear to be influenced by anything that alters the NZDJPY exchange rate.
They have fixed maturity dates, They appear to be off-market retail offerings that are backed up by forex trades held by the institution.

Discussion of the carry trade often brings up talk of thousands of Japanese housewives etc trading forex with Yen based accounts whose tactic is to hold longs in high interest differential (swap) pairs like NZDJPY. It works on a rising market and inflates the value of the kiwi. When the market looks soft there is a panic profit take and the kiwi returns to something closer to its fundamental value based on balance of trade. Currencies with high interest rates get inflated values as a result, the swaps favour holding long term positions in them, except when the exchange rate looks set to fall.

Why is it traded in pairs? My guess is that it is partly to encourage speculation and removal of the gold standard appears to have the same motivation. Speculation is touted as the holy grail that keeps any currency from getting far out of step from the rest. I am suspicious of holy grails.

[james_gsx]

There was an article not too long ago in SFO magazine about the carry trade, it was pretty good if you know nothing about it. I'll look for it on their website and if I find it I will post it.