What it means
A pegged currency band is a fixed-rate regime where the central bank commits to defending a tight trading range against a reference currency or basket. Hong Kong: HKD between 7.75 and 7.85 per USD, HKMA buys/sells at the edges. Saudi: SAR pegged at 3.75 per USD with effectively zero band tolerance. Denmark: DKK ±2.25% around 7.46038 EUR (ERM-II framework).
Why it matters
Bands work until they don't. The 1992 GBP exit from ERM, the 2015 EUR/CHF un-pegging, and dozens of EM peg failures all share a pattern: pressure builds against a band edge, reserves deplete, eventually the peg breaks discontinuously with a 5-30% move in a single session. Knowing the band parameters tells you where the trade is — long the side the band protects, with break risk as the downside.
How to use it
Track central bank reserves vs short-term external debt for any pegged currency. When reserves drop below 3 months of imports or below the level of hot-money inflows, pressure escalates. Wider onshore-offshore spreads (where applicable) are an early signal. Pegs near band edges trade with a small but non-zero break premium that grows with stress.
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