A Currency Peg is NOT a Risk-Free Trade

Unless you live under a rock, you’ve probably noticed there are some big events happening in Hong Kong at the moment.

As a trader, you may even decide to capitalise on these.

You might take a look at USD/HKD and notice it’s heading back towards the upper end of its range.

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As you may know, the Hong Kong dollar is pegged to the US dollar and is allowed to fluctuate within the band of 7.75 and 7.85 — which explains the range and price action.

You might think you’re onto a winner…

“If the market is pegged, this is a low-risk trade!”

That’s exactly what we’ve seen from traders on social media and social trading platforms. But it’s wrong…

You see, just because a currency is pegged now, it doesn’t mean it will always be pegged.

In fact, there are many investors who are already building positions thinking the peg is on borrowed time.

And what would happen then?

It would be like a compressed spring that is finally released.

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A similar situation happened in 2015 with the Swiss franc. It was pegged to the euro at 1.2. This led many traders to see trades related to this as being low-risk.

They probably don’t look at it that way anymore!

The Swiss National Bank suddenly removed the peg and the Swiss franc smashed through the ceiling!

You can see in the following EUR/CHF chart (weekly time-frame) that even after five years, the huge move still ruins the scale on my chart…

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As part of our risk management, we always recommend using a stop loss. However, this was one situation where a stop loss wouldn’t have done anything!

According to Business Insider, the broker IG lost around £30 million, as they were unable to sell their positions. Additionally, 200 of IG’s customers owed them a collective £18.4 million.

Some of IG’s clients’ losses actually exceeded their entire net worth and put them in debt. There were even stories of houses being sold to cover the amounts due.

FXCM, Interactive Brokers, Citi, Deutsche Bank and Barclays collectively lost around £500 million, while it’s expected that the losses from retail traders may have reached billions.

So, rather than being a low-risk trading situation, it can be quite the opposite. It’s more similar to picking up pennies in front of a steamroller. The huge risk might not be clear to see, as you pick up the relatively small profits — but it’s always lurking nearby, ready to wipe you out!

By Harley Heavens

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