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Thread: Fixed Currency Regimes: Exploiting pegged currencies for profit Part 2

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    Fixed Currency Regimes: Exploiting pegged currencies for profit Part 2

    There are fewer pegged currencies this decade, in comparison to the last. This is partly because floating currency regimes are more popular these days, and partly because the abundance of global liquidity during the past years ensured that crises were less frequent, and the need to introduce pegs was absent. We can expect that the popularity of the peg will come back after 2009, although this is far from being certain.
    Saudi Riyal

    The Saudi Riyal has been pegged to the dollar for decades. Itís currently maintained around 3.75 USD per SAR (riyal). Since Saudi Central Bank sits on top of sizable currency reserves, and as Saudi Arabia is an oil exporter, the possibility that the SAR peg will be abandoned due to external pressure and financial market turmoil is minimal. Throughout 2008, there was speculation that Saudi Arabia would abandon the peg in response to rampant inflation caused by the depreciating U.S. dollar, but the rumors were proven wrong repeatedly by the adamant denials of the Saudi authorities. As of this day (July 2009) there are no announced plans to drop the peg any time soon.

    Saudi Arabia is a member of the Gulf Cooperation Council, which aims at greater political cooperation and eventual monetary union.

    Traders can exploit short term fluctuations in the value of the Riyal by opening an account with a broker which offers low spreads for this pair. Since the fluctuations which we hope to exploit are small and frequent, the size of the spread charged by the broker will have a direct impact on the profitability and frequency of our trades.
    Danish Krone

    The Danish Krone is part of the ERM II, which determines the relationship of EU memberís nations which do not use the Euro, with the Euro system. It is expected that the Krone will be abolished sooner or later, as Denmark chooses the path of closer integration with the European financial system. Plans are in place for a referendum in 2011.

    The Krone is one of the safest pegged currencies in the world for currency traders. The Danish Central Bank is very predictable, and it will regularly intervene if the EUR/DKK moves to far away from the central point of 2.25 percent band at 7.46. In addition, the European Central Bank has a commitment to provide unlimited liquidity if the Danish authorities have difficulty in maintaining the peg, which makes it almost impregnable against any kind of speculative attack in the short term.

    It is easy to trade the Krone. All we need to do is keeping an eye on large aberrations from the central rate, and betting that the peg will hold. Small sums gained over time may form significant amounts.
    Hong Kong Dollar

    The Hong Kong dollarís peg is maintained by the Monetary Authority of Hong Kong. Until 2007, the HKD was pegged strictly at 7.80 per USD, but after the events of that year, the depreciation of the dollar, appreciation of the Chinese Yuan, and the resultant high inflation, the HKD is floating in a band of 7.75-85. The Hong Kong authorities are committed to intervening when the band is in danger of breaking to either side, and they have the reserves and financial power to do so.

    Trading this currency involves similar methods. We need to make sure that weíre up-to-date with government policies, and especially with the decisions of the Peopleís Bank of China, as this institution has the greatest impact on the choices made by the Hong Kong authorities.
    Conclusion

    Trading pegged currencies is a valid, safe, and lucrative method for which the needle of the compass is the fundamental situation of the economy. It is possible to profit greatly from the fluctuations of a fixed currency, but the trader must be aware of the current account situation and central bank reserves in order to avoid being caught in the midst of a shock which can create losses with the speed of lightning. Fortunately, such scenarios develop very slowly, and there is almost always a way to be aware of them before currency collapses occur.

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    Thanks for the post.

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