A term spread trade is a long-short trading strategy, guided by
relative yield curve steepness.
They represent a class of FX trading strategies where predictive signals for exchange rates are based on the entire yield curve.
Term spread strategies are refined carry trades based on both interest rate differential AND relative yield curve slopes.
Differentials in yield curve slopes across countries convey information about differences in term premia.
This additional forward-looking information is neglected by standard carry trade investors, who only consider the short end of the yield curve when deciding which currencies to buy and sell.
The simple form of term spread strategy involves going long in currencies with low term spreads (the Australian dollar and the Swedish krona are recent examples) and short currencies with high term spreads (recently
sterling and the Mexican peso).