Importance of Swap Charges in Forex

Swap calculations are done at the end of the day, for positions that remain open after 5:00pm ET. This is important for those who want to hold on to long term positions for a considerable period of time. Traders who use strategies focused not only on intraday price fluctuations but also on trend trading, on the basis of fundamental market changes, need to carefully think about swap rates.

In addition, forex swap charges are vital for traders using carry trade strategies. These strategies are entirely based on the interest rate differential between two currencies. The currency with a lower yield becomes the funding currency (borrowed currency) and the borrowed amount is used to buy a higher yield currency.

For instance, the Swiss franc (CHF) has a negative spread with almost every currency, which suggests that a trader who goes long on the ‘swissy’ can expect negative swap rates. On the other hand, if someone goes short on it, they can expect a positive swap when positions are held overnight. In contrast, going long on the GBP can result in positive swap rates against the euro, yen and swissy, while negative swap could be expected with the US, Canadian and Australian dollars.

Forex swaps are also important for hedging purposes. If a trader opens a position, expecting a certain type of market movement that hasn’t begun yet, they may consider opening another position in the opposite direction, without closing the first one. This is often called “lock mode hedging.” The low spread between the rates, which is ensured by interbank swap, can help minimise the cost of maintaining such positions.