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|The VND is seen as one of the least depreciated currencies in the region, Photo: Le Toan|
FX on fire
The daily fixing last Thursday set itself again to a record high of VND22,662 a dollar, adding VND13 a dollar on top of the previous day’s rate, before slightly cooling down to VND22,660 on Friday.
Across local commercial banks, the FX rate was reported as edging up last Friday, following a sideways movement seen days before. Each dollar was sold at VND23,095-23,125 and bought at VND23,000-23,030 a dollar, with VND10-20 added on both the buy and sell sides.
The upswing of the daily fixing and FX rates in the local market happened in response to the greenback gaining power against other major currencies, with the dollar index breaking the 95.00 figure last week.
With the daily rate consistently trending upward in the past four weeks, investment advisory manager Phan Dung Khanh at Maybank Kim Eng Securities in Ho Chi Minh City said that the causes were attributed to several factors, including the Federal Reserve (Fed) raising its interest rates and tightening its money supply.
“As pressure rose from the Fed meeting its inflation target and the long-term US bond yields exceeding 3 per cent, the USD has gained power against other major currencies. What’s more, uncertainty caused by rising inflation and other countries’ interest rates has prompted investors to sell and seek safe havens. As the VND is pegged with the USD, the dong has depreciated accordingly, yet at a lower degree compared to other currencies,” said Khanh. “The dong has lost some 1.5 per cent against the USD in the year to date.”
Nguyen Xuan Binh, head of research at KB Securities Vietnam (KBSec), added that the dollar has gained momentum as the Fed intends to increase its rates four times in 2018, instead of three times as previously predicted. “However, what affected the FX market most in June was the build-up of trade tensions [between the US and China]. The trade war intensified into a barrage of tit-for-tat tariff increases against major trading nations, adding to near-term USD strength and exposing vulnerabilities for some emerging market (EM) countries,” Binh said.
By July 18, 2018, depreciation of the dong against the USD was 1.53 per cent according to Binh, compared to an average of 3.37 per cent in the major Asian currency basket. “At this stage, the dong is still seen as a stable currency in the region - one of the least depreciated currencies, whereas since January, the Indian rupee has depreciated by 7.32 per cent, the Philippine peso by 7.19 per cent, and the South Korean won by 5.76 per cent,” he said.
CNY on watch
The strengthened greenback, however, was not the only cause that tripped the FX rate up last week. The dong, in the opinion of Ngo Dang Khoa, head of global markets at HSBC Vietnam, was rather stable for quite some time before stumbling upon a stronger USD in April and May. According to Khoa, the currency, in fact, started to become unstable when the Chinese yuan (CNY) devalued on the back of the US-China trade tensions.
“Such a development is understandable since China is a significant trading partner of Vietnam, accounting for over 20 per cent of the country’s total import and export turnover,” said Khoa.
A CNY devaluation, according KBSec’s Binh, would likely have three important economic impacts on Vietnam, the first being a widening of Vietnam’s trade deficit with China, which has been widening consistently since 2002, as imports from China have surged without a corresponding increase in exports.
In addition, Vietnam is sensitive to China’s domestic spending via the exports of goods and services - mainly consisting of resource consumption and agricultural products, including tourism, in which Chinese tourists account for 30 per cent of arrivals. “CNY depreciation will reduce the domestic demand, as import costs rise in the short term, urging consumers towards purchasing local products,” Binh said.
A weaker FX rate can help boost Chinese export competitiveness, as they could compete with Vietnamese goods in other countries. Textiles, garments, and footwear are the major products in which Vietnam competes with shipments from China to the EU and the US.
In terms of CNY versus VND, the dong is still under control and the State Bank of Vietnam (SBV) will step in to steady the currency if needed. “However, because of an increasing trade deficit with China, CNY devaluation will widen the gap and the VND will slightly appreciate against the yuan in the short term,” said Binh.
“I do not think there will be a sharp depreciation for the VND like the one in 2015, since the SBV already implemented a new FX mechanism after that incident, which adjusts the FX rate on a daily basis,” said Tharabodee Serng-Adichaiwit, senior vice president and general manager at Bangkok Bank (Vietnam). “So the FX will move gradually, if at all.”
In the fight
At the beginning of July, the SBV indicated that the monetary authority is ready to intervene in the FX market if needed, in a bid to stabilise the FX rate and the macro-economics. “The SBV is always prepared to monitor the exchange rate and intervene in the FX market should the market supply and demand start to show any need, to ensure the smooth operation of the FX market,” said SBV Governor Le Minh Hung at the government’s online cabinet meeting held on July 2.
The SBV last Wednesday racked up its VND-denominated overnight rate to 1.9 per cent per annum, from Tuesday’s 1.63 per cent and Monday’s 1.36 per cent. This was seen as a vigorous move, as the rate was sitting at 0.88 per cent at the beginning of July. The overnight rate rise consequently narrowed the gap between the USD-denominated and VND-denominated interbank rates.
Commenting on the recent movement of the daily fixing, Khanh of Maybank Kim Eng said the SBV will make daily adjustments in both directions to reflect the market development and he expected that the dong will only strengthen slightly against the greenback towards the year’s end.
In the short term, according to Binh, given Vietnam’s sound macro fundamentals including the balance of trade, adequate FX reserves, and narrower USD-denominated and VND-denominated interbank rates, the dong may hold its value if the Fed continues hiking its rates.
“If the dollar index fluctuates around the 94.00-97.00 band and CNY/USD does not fall below 6.7, the dong is expected to depreciate within 2 per cent, at around VND22,900 a dollar,” Binh said.