What does 'Unwinding Carry Trades' mean?

I see lots of referenced to this term but I cannot understand what this is. I notice that Wikipedia refers to the size of the forex market to be split between the carry and spot. I think that I demo trade in the spot market. the term 'carry' perhaps eludes me though. I see references to interest rate differentials earn on the various currencies.

So is the 'carry trade unwind' that I'm looking at on the AUDUSD a reference to people(institutions) using complex hedging strategies to earn what I know as swap? If so, why would someone unwind that position. Has the interest rate differentials been affected by the Australian Reserve Bank interest rate increases?

Hi Fourth,

check out http://www.investopedia.com/terms/c/...carrytrade.asp

You're correct that it's a strategy to exploit differing interest rates, but it's usually not complex. The only complexities that I'm aware of is your money management to make sure you can survive hundreds (and sometimes thousands) of pips going against you.

For information on how swap is calculated, try: http://fxtrade.oanda.com/fxtrade/int...culation.shtml. For a simple chart showing per lot how much you make/lose in swap try http://www.interbankfx.com/Tools/SwapRates.aspx. FYI, swap will differ from broker to broker.

As far as the "unwinding", it essentially means that when investors get scared they put their money into safer investments. This selling off ( and/or profit taking) of carry trades creates momentum opposite of the interest positive trade, which then scares other carry traders into closing positions, which creates more momentum opposite the carry trade, repeat ad nauseum

btw, these answers will presumably be proven wrong by a more experienced trader... be sure to listen to them instead

I do not have much knowledge about it but what I know is that it makes the market more vulnerable. I have found some articles on carry trades
which I think would be helpful for you.

http://forex.gftforex.com/public/blo...eekly+.2007-10
http://www.morganstanley.com/views/g...70816-Thu.html

terrible...these kind of things sweep people accounts

Such things sweep people account but interesting thing is that people are still interesting in such practices. Carry Trade is not a safe practice so why get indulge in it.