VND stable as USD rises and yuan is weakening

The VND remained resilient against external factors including the stronger greenback and the weakened Chinese yuan, with a forecast for the dong to devalue by some 1% by the end of the year to short up exports.

vnd stable as usd rises and yuan is weakening hinh 0

The State Bank of Vietnam (SBV) boosted its daily fixing to VND22,578 a dollar on May 10, an increase of VND10 from the previous day, VND20 from May 7 and some VND30 on top of the daily rate posted on May 2 – the day the Federal Open Market Committee (FOMC) ended its two-day meeting. The adjustment, while on the rising trend, according to Tran Chi Thanh, deputy director of treasury at the Vietnam International Bank (VIB), was within the SBV’s policy that allows for the upward and downward movements of the foreign exchange (FX) rate on a daily basis.

“The FX rate in the market, as far as we’ve observed, has not changed much,” said Thanh.

In fact, the dong stayed put against the dollar across numerous banks last week. One USD was traded at VND22,805 on the sell side and VND22,735 on the buy side for five straight sessions starting May 4 at Vietcombank, after propping up to VND22,795 a dollar on May 3.

“The movement of the USD/VND at banks has reflected the actual FX supply and demand in the market, where the supply of USD is currently abundant, while another factor that holds up the FX rate is the stable VND-denominated and USD-denominated interest rates,” Thanh said.

According to Ngo Dang Khoa, head of global markets at HSBC Vietnam, the VND has remained moderately resilient against the stronger greenback thanks to sound fundamental footings such as robust GDP growth, widening current account surplus, and strong USD inflows (from both FDI and FII), which have helped boost the country’s FX reserves.

“On the other hand, the SBV’s prudent FX policy, with a sense of favouring VND stability, has proactively managed potential volatility in capital flows as the Federal Reserve (Fed) continues to hike rates,” said Khoa.

The first week of May saw the FOMC leave its interest rates unchanged, with indications for an additional three to four rate hikes during the remaining part of the year, while the People’s Bank of China (PBOC) devalued its yuan to RMB6.3670 per dollar.

The Fed, as Khoa noted, seems to be sticking to the path laid out in its ‘dot’ projection, which shows a higher average Fed ‘dot’ plotted in 2018, matching the market’s dovish stance. The mismatch between higher US rate differentials and a weaker USD is likely to reverse. In contrast, other central banks across the G10 members face challenges to begin or extend their tightening process.

“The local currency is not immune from rate hikes and a stronger USD overall. However, thanks to the adequate growth in FX reserves over the past few months, the central bank would rather have sufficient ammunition to balance the need for stability than export competitiveness,” he added.

The local FX reserves, as the government’s regular meeting held on May 3 revealed, have reached a record high of US$63 billion, of which US$4 billion was raised in March and April alone, following the New Year holiday in February.

Khoa of HSBC said that the central bank’s USD/VND fixing mechanism is currently partly based on the movements of the basket of currencies having large trade relations with Vietnam, which also includes the USD. The recent rally in the USD index since mid-April has provided positive correlation to a higher daily FX fixing rate of the SBV.

Meanwhile, with China being Vietnam’s largest export market, the weakened yuan could possibly pose a great concern for local exporters. Yet the weak currency will not immediately take its toll on the local market, as Vietnamese exports are largely paid for in USD rather than yuan.

Towards the year’s end, VIB’s Thanh expects the VND to appreciate by 1% at most against the USD, subject to the SBV’s objective to support local exports.

VIR

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