FX · Core
Currency Peg
A peg is a policy that holds the exchange rate to a target or band — a promise that spends reserves and rates when the market disagrees.
Definition
Hard pegs (currency board, dollarization) vs crawling bands vs dirty floats. Defense is rates, reserves, and capital controls (impossible trinity). A peg is a put the central bank has written on the FX rate.
Why it matters
Breaks are discrete. Carry into a peg is picking up pennies in front of the break.
Case
ERM 1992, CHF floor 2015, and various EM pegs: the day the peg dies, the option you sold is in the money against you.
How to read it
Reserves, the policy rate versus the anchor, and the political willingness to hike. A quiet peg can be a coiled basis.
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