Forex rollover rates are the interest rates traders earn or pay for holding open positions overnight. These rates can affect how much money you make or lose, especially if you hold onto a trade for a longer period of time.
This article breaks down what forex rollover rates are, how they work, their calculations and the impact on forex trading strategies.
How Do Forex Rollover Rates Work?
Forex rollover rates are a key aspect of forex trading on margin, which enables traders to control larger positions with smaller capital. When a trader opens a position in the forex market, they sell one currency to purchase another. For instance, if they buy EUR/USD, they sell U.S. dollars to buy euros.
Both currencies have an associated interbank interest rate, and the difference between these two interest rates is known as the rollover rate. If a forex position is held overnight, your broker will close your position at the closing rate, usually at 5 p.m. EST, and open it for you the next day. This closing and reopening is known as a rollover, and you’ll either earn or pay the interest rate differential between the two currencies.
The trader earns a positive rollover rate if the bought currency has a higher interest rate than the borrowed currency. Conversely, the trader pays a negative rollover rate if the bought currency has a lower interest rate than the borrowed currency. The rollover rates are either added to or subtracted from the trader's account balance, depending on whether they are positive or negative.
How Rollover Rates Are Calculated
Rollover rates for currency pairs depend on the overnight interest rate set by the central bank of the currency being traded and a broker's markup or fee. A broker's markup or fee represents the broker's profit or cost for the rollover service. The overnight rate is the rate banks use to lend or borrow a currency in the interbank market. It reflects the currency's supply and demand and the central bank's monetary policy expectations.
The higher the rate, the more attractive it is to hold that currency and earn interest. To calculate the rollover rate, subtract the overnight rate of the quote currency from the base currency, then divide by 365 times the base exchange rate.
For example, if the overnight rates for EUR and USD are 0.25% and 0.50%, respectively, and the exchange rate is 1.20, the rollover rate is:
(0.25% - 0.50%)/(365*1.20)
Rollover rate = 0.000057
You will pay 0.000057 USD per EUR for holding this position overnight. You will receive this amount if you hold a short position in EUR/USD.
A broker may add a fee on top of this rate to charge for its services.
Positive and Negative Rollover Rates
Rollover rates in forex trading can be positive or negative depending on whether traders earn interest on the currency they bought or pay interest on the sold currency. Central bank policies and market sentiment influence these rates.
Central banks set interest rates based on monetary policy objectives, such as inflation control, economic growth and financial stability. Hiking interest rates make its currency more attractive to investors, increasing demand and raising its relative value. Lowering interest rates decreases a currency's appeal and demand as investors will earn less.
Market sentiment, which refers to investors' overall mood and expectations, can be influenced by economic data releases, geopolitical events, news headlines and risk appetite. When sentiment is bullish, investors favor riskier currencies with higher returns, which drives demand and pushes up their value. When sentiment turns bearish, investors seek safer currencies with lower returns, which boosts their value relative to riskier currencies.
Factors Influencing Rollover Rates
Central bank policies, such as interest rate decisions and monetary easing measures, can significantly impact rollover rates. For example, if a central bank lowers its interest rate, the rollover rate for the currency will decrease, making it less attractive to hold overnight. On the other hand, if a central bank raises its interest rate, the rollover rate for the currency will increase, making it more appealing to hold overnight.
Market sentiment, economic data releases and geopolitical events can also affect rollover rates. These factors can influence the demand and supply of currencies and the expectations of future interest rate changes. For instance, if a country reports strong economic growth, its currency may appreciate, and its rollover rate may rise. If a country faces political instability, its currency may depreciate, and its rollover rate may fall. Awareness of these factors helps traders make smarter trading decisions.
The Impact on Forex Trading
Rollover rates can significantly impact a trader's profitability, especially for trades that involve holding positions for extended periods. If any trader is using leverage, the cost of rollover rates can also be amplified. Traders holding positions overnight may earn or pay substantial interest depending on the currency pairs traded and the prevailing rollover rates. Traders should factor in rollover rates when determining trade strategies, as they can affect the overall cost of maintaining positions.
Rollover rates can also impact the liquidity or pricing in the market depending on the volume and direction of rollover trades. This activity may increase volatility in the market when brokers open and close positions.
Rollovers and Carry Trades
Carry trade involves borrowing a currency with a low interest rate to purchase a currency with a higher interest rate. A carry trade aims to benefit from the interest rate differential between the two currencies and potential appreciation of the bought currency.
While carry trades can provide consistent returns over a long period, they are not risk-free. Exchange rate fluctuations and changes in interest rate differentials can impact the profitability of a carry trade. If the bought currency depreciates against the borrowed currency, exchange rate fluctuations can erode or reverse the profits from rollover interest and capital appreciation. Changes in interest rate differentials can also affect the profitability of carry trades if the interest rate gap between the two currencies narrows or widens.
While carry trades can be profitable, traders must be mindful of the risks involved. You need to have a solid understanding of market dynamics and implement risk management strategies to minimize potential losses.
Tips for Managing Rollover Rates
If you hold forex positions overnight, you may encounter rollover rates and need to factor them into trading costs. Here are some practical tips for traders to manage rollover rates effectively.
- Monitor central bank policies: Central bank policies are one of the main drivers of rollover rates, as they determine the overnight interest rates for each currency pair traded in the forex market. Staying up-to-date on monetary policy helps you to follow the direction and magnitude of interest rates that will impact rollover rates.
- Diversify currency pairs: Diversifying currency pairs can help traders reduce their exposure to rollover risk by spreading their positions across currencies with different interest rates and market dynamics.
- Consider shorter-term trades: Shorter-term trades can help traders avoid or minimize rollover costs by closing their positions before the end of the trading day or before significant changes in rollover rates occur.
- Use a reputable broker: A reputable broker offering competitive rollover rates and transparent fee structures can help traders avoid hidden charges and unfair practices that may affect their rollover rates.
Forex Rollover Rates Explained
Forex rollover rates are an important aspect of forex trading that can allow traders to earn passive income and enhance their returns. By understanding how rollover rates work, how they are calculated and how they affect forex trading strategies, traders can make strategic decisions and optimize their positions.
Frequently Asked Questions
What is a forex rollover?
A forex rollover extends the settlement date of an open position in the forex market. It involves closing the position at the end of the trading day and reopening it at the new opening price the next day.
What hour does forex roll over?
Forex rollover usually occurs at 5 p.m. EST, the end of the trading day in New York, the largest forex market in the world. However, some brokers may have different rollover times depending on their server locations and liquidity providers.
What are FX swap rates?
FX swap rates are the interest rates applied to FX swaps, which involve exchanging two currencies at a specified date and then reversing the exchange later. FX swap rates are similar to rollover rates as they reflect the difference between the interest rates of the two currencies.
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About Anna Yen
Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.