Whether trading at cfd trading South Africa or at any other forex brokerage, trading fix currency is one of the low risk high reward method of having to profit in the forex trading market.
Although it is not one which is popular with majority of traders, a regular trader that has great analytical skills can be able to pocket large profits using such a method in the shortest time possible as long as they become patient and take those opportunities which are suitable for the expectations at hand.
What is a currency which is pegged?
A currency that is pegged refers to a monetary unit which has a value that is fixed to another one. By having to choose such a path, the central bank of the nation doing the pegging abandons its monetary independence.
Because a difference in the interest rates of the currency which is pegged and the currency controlling it might be exploited by the arbitrageurs distorting the rate of exchange, the central bank which is pegging has no choice other than to mirror the policies of monetary of the other nation.
Currencies which are pegged are normally maintained by the central bank by a rate which is fixed. In most instances, pegs are normally introduced after economic or political turmoil and the rate is normally determined by certain historical factors.
But unless the capital count gets closed, which denotes that the private sector is unable to exchange currencies and sell and buy assets internationally, there will be a certain fluctuation which will be around the aimed rate that is fixed as declared by central bank. Traders using the pegged currencies are known to profit from such fluctuations through betting, in majority of cases, that the peg is going to hold.
Some examples
There are certain currencies which have been pegged in the current decade as compared to the previous decades. It might be as a result of regimes for floating currency being more popular nowadays and at the same time, the abundance when it comes to the global liquidity that happened in the past few years ensuring that there was less frequency of crises, and the need of introducing pegs not being available. It is possible to expect the peg popularity to happen now although it is not certain.
Riyal for Saudi
The Saudi riyal got pegged on the USA dollar for decades now. Because the central bank of Saudi sits on top of a currency reserve which is sizeable, and Saudi Arabia being an oil exporter, the chances of the SAR peg to be abandoned because of financial market turmoil and external pressure is minimal.
Though in 2008 there were speculation of Saudi Arabia abandoning the peg due to inflation increase that were caused by USA dollar depreciating, but the rumors remain just that, rumors, because the Saudi Arabia authorities disputed it. At the moment, there are no announced plans regarding dropping the peg any time soon and thus, it is here to stay.