Trading Pegged Fixed Currencies

A pegged currency is the name used for currencies whose values are matched to some other asset’s value where the asset can be one currency or set of multiple currencies. Pegged currency is also known as fixed currency. Central banks are responsible for fixing the rate of pegged currencies and then, protect and maintain the rate to gain economic stability.
There can be many different motives for fixing rate methods and as a result, there can be different advantages and disadvantages on the nation’s economy. Pegged currencies are very useful in helping nations with inflation problem where prices keep on rising continuously and there is no stop thus bringing positive confidence amongst public for economic developments of nation. In 90’s Argentine when US dollar was facing uncontrollable inflation, it was pegged to peso. Thus, pegging a currency with some asset can be a temporary solution to protect volatile changes in currency which brings inflation.
Trading Ways:
There are several ways to trade pegged currencies which are described below:
Exploiting crises
The in-charged authorities adapt themselves in various difficult situations while managing the fixed currencies. In year 1998, during the time of Asian crisis many fixed currencies were damaged by speculators intending to give control to the central banks in Asia which at that time were facing serious deficits in money. This resulted in worse situation. Similar cases happened with nations all around the world in period 1998-2000 and during such phases some of the nations faced serious economical problems and lost their credibility. However, today such downfalls of currencies are very rare because of improved efficiency of in-charged organizations and because many nations have learnt to avoid making their economic model on the basis of short-term inflows and larger amounts of deficits.
Trading currency interventions
This strategy has a lot of opportunities which are available frequently as compared to other strategies. It also has lesser risks, more profits and highly tradable nature. However, in this strategy the central bank controls and manages the currency to maintain a smoother currency with lesser fluctuations and to ensure power and credibility to huge foreign reserves. Clearly, the interference for currency fluctuations is present however there are negligible risks involved in profits. The trades should act calm when there are rumors in market and use the credible and strong government authorities which have full control and entrust some of the risk management tasks to the in charge authorities and central bank authorities.
Examples:
With detail described above, in the following lines you will see two examples of currency pairs with some supposed trading scenarios.
Saudi Riyal
The Saudi Riyal was pegged to the USD a long time ago, and since then this pegging has helped a lot in solving problem of inflation in the nation of Saudi Arab and furthermore, it has also helped in making Saudi Arab an important friend which provides protection for security and independence. As the pegging is more political then economical, Saudi Arab must take care of it and it cannot break this position till United States is a superpower and Saud family is in charge of Riyadh. Therefore, the trader can start trading positions with the currency pair with high leverage and negligible risks of harmful volatility.
Danish Krone
The Danish Nationalbanken posses no target for interest rate and money supply. Its only purpose they have is to keep krone pegging with Euro. The pegging of crown to euro has 2.25% band around a 7.46038 central rate in the grid ERM 2. ERM (European-Exchange Rate Mechanism) came into existence in year 1979 with intention of permanent adoption of Euro currency across all European Common Market members. When Euro was launched in 1999, ERM 2 replaced it. ERM 2 is responsible in keeping the fluctuations of currency pair EUR/DKK within the 2.25% band on positive or negative side of the 7.46 central value.
Traders take use of the fluctuations in the currency pair EUR/DKK from a long time. In the last decade, there had been no such event of disturbance in agreement of ECB and Nationalbanken thus, making the trading currency pair smooth. The indicators predict that Dames will be joining Euro in 2011 and till then, the beginner traders can try their skills in this simple to trade currency pair.