Currency pegs sound dull, until they break. Then they become some of the most violent and profitable events in forex.
A currency peg is when one country fixes its currency to another, usually the U.S. dollar or euro. Instead of letting the exchange rate float, the central bank actively maintains a fixed level or a narrow band.
For example:
HKD is pegged to the USD between 7.75–7.85.
SAR (Saudi Riyal) is pegged to the USD at 3.75.
These pegs are used for stability. For oil-exporting countries like Saudi Arabia, pegging to the USD (the currency oil is priced in) makes revenue and budgeting more predictable. For financial hubs like Hong Kong, it boosts investor confidence.
But a peg doesn’t float freely. To defend it, central banks intervene constantly, buying or selling their own currency, adjusting interest rates, or restricting capital flows. It’s a balancing act, and one that costs money.
And here’s where it gets dangerous.
When Pegs Break, Traders Get Burned (or Paid)
No peg lasts forever. If a country runs out of reserves or loses economic credibility, the peg can snap, and usually violently.
Take Switzerland. In 2011, the SNB pegged the franc to the euro at 1.20 to protect exporters. Traders believed the peg was untouchable, until January 15, 2015, when the SNB shocked markets by dropping the floor.
EUR/CHF crashed 30% in minutes.
Brokers failed. Accounts got wiped. Traders who ignored the risk paid the price.
That’s the risk: when a peg breaks, it doesn’t give you time to react. Liquidity vanishes. Stop losses fail. Slippage becomes brutal.
How to Trade Pegs (Carefully)?
Most traders use pegged currencies for range setups. The HKD, for instance, trades in a narrow band ideal for mean-reversion strategies.
But if you suspect a peg might break, watch for:
Falling central bank reserves
Extreme FX volatility pricing
Outflows or political instability
Emergency rate hikes or capital controls
These are warning signs.
You can bet against the peg, but it’s expensive and risky. If you’re wrong, you’ll bleed slowly. If you’re right, the payoff is massive. Just ask George Soros 😀
Here’s the Takeaway:
Currency pegs aren’t “set and forget.” They’re engineered stability, until they’re not. For traders, pegs create opportunity, but also serious risk. Know what’s behind them, watch for stress, and never assume they’re unbreakable.
Because when a peg breaks, everyone feels it.