Forex Interest Rates and End-of-Day Rollovers

When you are trading currencies your trades are subject to the interest rate differential between the two countries currencies that you are trading. When trading in the Spot Forex market this interest rate differential will be reflected as either a credit or a debit directly to your account. Additionally only trades that are held overnight are subject to this interest "carry". Trades are opened and closed during the same trading day not subject to interest carry.

Each currency pair has an overnight interest swap rate that is based on the overnight interest rate that banks are able to borrow unsecured funds from other banks. So when trading Forex your position will either have a positive or negative overnight interest swap rate. Now while these swap rates are generally only a fraction of a percentage point because we are using leverage when trading Forex these fractional interest rates can make a big difference to your position. This is especially true when holding longer term positions and should be considered before entering a long term position.

In the simplest form you can think of the interest difference in the variance of central bank rates. For example currently the Reserve Bank of New Zealand has set an interest rate of 3.0% whereas the US Federal Reserve Bank has set an interest rate of 0.25%. So the difference between these two rates is 2.75%. So theoretically you should be gaining 2.75% on your long NZD/USD trade. Now of course depending on the which bank you are dealing with the actual overnight rate in which that bank will be able to borrow funds will vary from the rate set by the Central Bank of the country in whose currencies that you are trading.

Additionally as a retail trader you will not benefit from the entire spread since your broker will charge you a fee for borrowing funds. So remember because when you are trading NZD/USD you are buying NZD and simultaneously selling or borrowing USD. So your broker will charge you for borrowing the USD pair. These rates will vary from broker to broker and will affect how much you will actually earn (or pay) in your interest rate on your trade.

Each broker has different rollover swap rates and traders should check the current swap rates with their broker. To give an example of how the swap rate can affect your account let’s take the NZD/USD pair. Current overnight swap rates for this pair on are $0.47 per each 10,000 lot for a long position and -$0.75 per each 10,000 mini lot for a short position. So for a long position you would be earning $0.47 per day or $171 per year. Now because you only need $130 in margin to hold this lot you are actually earning 130% annualized return on the cash required to hold this position. This is known as positive carry. Now alternatively if you were to short this pair then you would be paying $0.75 each day that you held the position short or -$273 per year this is known as negative carry. Again using our margin requirement of $130 this would equate to 210% negative return on the margin required to hold this position.

End-of-Day Rollovers

In the Forex market settlement is designed to take place two business days after the trade is place. Because most traders do not want or expect their positions to be delivered, brokers will continually rollover open trades at the end of each trading day. This rollover involves closing out any positions left open at the end of the trading day and then re-opening an identical positions at the beginning of the next trading day. By rolling over positions traders never take delivery of the currencies that are being trading thus in effect your open positions are never technically settled. This rollover is executed automatically by the broker and this is when your account will be credited or debited your interest carry. Rollover times usually occur at 5pm Eastern Time but vary from Broker to Broker.

Michael Golembesky covers Forex, the S&P 500 and the VIX, contributing frequently to Avi's Market Alerts service at EWT while also hosting his own VIX Trade Alerts service and co-hosting the EWT Forex service. Learn more about Mike here and his services here.