A carry trade is a trading strategy that an investor or trader borrows at a low-interest rate and invests in a higher yielding asset.
In Forex trading, interest is debited or credited daily from a trader’s account that has open positions.
In recent years, the most popular strategy for carry traders is to sell Japanese Yen and buy currencies with a higher rate of return, like Australian Dollar, New Zealand Dollar or British Pound. Because of the near-zero interest rates on Japanese Yen, the carry trade involved had reached $1 trillion by 2007 and it became one of the most favored currencies for borrowing.
For example, if you buy AUD/JPY, which means you sell Japanese Yen (which yields 0.00% a year) and buy an equivalent amount of Australian Dollar (which yield 3.50% a year) at the same time, you would receive 3.50% a year for holding Australian Dollar without paying any interest for borrowing Japanese Yen as long as you hold the position.