In this paper concerned with soil water dynamics in a managed cutover peat field, the microscale hydrological processes and parameters governing water flow and storage through variably saturated peat are investigated. An open water ditch-reservoir enhanced wetting of adjacent cutover peat, maintaining the water table depth above 43 cm during the summer, surface soil moisture above 45%, and water tension in the surface layer above −45 mbar. Desaturation of pores was noted in the −2 and −10 cm depths, but at −30 and −50 cm a decrease in moisture content of several percent was associated with compression of the peat as the water table dropped. Air entry occurred only at pressures below −15 mbar. Seasonal subsidence resulted in cumulative vertical displacement in excess of 10 cm during the study period. Typical settlements in the peat ranged between 11 and 23% of the lowering of the water table. Considerable hysteresis was observed, and vertical displacement was 5 times greater in response to water loss, compared to rewetting. The specific storage (Ss) in the 180 cm thick deposit averaged 9.4 × 10−4 cm−1 during drying periods but averaged only 2.6 × 10−4 cm−1 on rewetting.Ss was more important than specific yield (Sy) in the overall aquifer storativity. Transient hydraulic properties resulted from the shifting soil structure. The increase in peat bulk density caused by drying increased the water retention capacity and decreased hydraulic conductivity. Mean saturated hydraulic conductivity was 15 cm d−1 and decreased 2 orders of magnitude as the degree of saturation dropped from 1 to 0.4. The horizontal/vertical anisotropy ratio was 4. The changing surface elevation in response to seasonal subsidence had a profound influence on the nature of the storage changes and hydraulic parameters of the peat soil.