Central exchange rate is crawling up

24-Jan-2019 Intellasia | VnEconomy | 6:00 AM Print This Post

On January 21, the central exchange rate announced by the State Bank of Vietnam (SBV) has reached 22,870 dong/US dollar, the highest since the beginning of 2016when the exchange rate was born. This record was resulted from a series of consecutive and quite strong increases from early 2019 up to now. Overall, the central rate has gone up by 45 dong compared to the end of 2018.

The above movement was noted, in the context of the real exchange rate on the inter-bank transaction channels, between banks and organisations and residents. It plummeted in the free market at the end of 2018 and stabilised from early 2019, which is similar to the period of the beginning of 2018, when the SBV also gradually raised the central exchange rate when the financial market was stable, especially in the condition of rich supply of foreign currency and large quantities bought by the authorities.

This time, SBV also bought a large amount of foreign currency, estimated to reach nearly 1.5 billion US dollar from the beginning of January 2019.

The central exchange rate continuously increased strongly as above was placed in the changes of US dollar index and large currencies relatively stable at this time.

Accordingly, the question arises: why did SBV take such proactive steps?

First of all, before 2016, the reference exchange rate was the average interbank rate, announced by SBV every day. This rate was highly subjective and there were many times of hardening as the exchange rate was fixed during long period while the market was constantly moving and changing.

The average interbank exchange rate in the past often moved along with the adjustment of “leapfrogging”, usually increasing by 1 percent after about 36 months of standing still. Sometimes, this gap was shortened due to market volatility.

Since the beginning of 2016, SBV has switched to applying the central exchange rate mechanism. This mechanism is also relatively subjective, still placed in the composition when calculating the macro and internal balance of the economy, beside the basket of reference currencies.

The point has been noticed until now: despite moving to the central exchange rate mechanism, it still inherited the starting point of the previous average interbank exchange rate, which was at a low level.

The higher part of the exchange rate in the market is at the amplitude of three per cent compared to the central rate, almost only in the positive part.

With the above characteristics, in early 2018 as well as 2019, the central exchange rate is still low. Specifically, 22,870 dong/US dollar is currently much lower than the market rates, which are all over 23,200 dong/US dollara big gap.

Accordingly, it is understood that the intention of the authority is to gradually narrow this gap, bringing the central exchange rate closer to the “common ground” to better reflect the market.

And after these steps, the central exchange rate reached the new high record; the amplitude-based lane allows the real exchange rate in the market to become wider, better reflecting the movement when it arises.

In spite of high levels, the central rate is still very low compared to the real exchange rate in the market. Accordingly, SBV is proactively bringing it to a new equilibrium point while its impact and the temporal influence on the market are almost not shown.

In other words, the foreign exchange market and the US dollar/dong exchange rate are in a stable period, which are conditions and opportunities for SBV to actively lead the central exchange rate by taking the above steps.

Moreover, “dove signals” from the US Federal Reserve (FED) about being patient, slowing down and even temporarily suspending plans to raise interest rates this year is considered as one of the great backings from the outside.


Category: Finance, Vietnam

Print This Post

Comments are closed.