Forex market faces a lot of pressure in September

15-Sep-2018 Intellasia | Dau tu Chung khoan | 6:00 AM Print This Post

Closing August 2018, the foreign exchange (forex) market was said to be in the most stable status in the past three months. However, in September, the tension is forecasted to increase due to the rising pressure from the possible interest rate hike of the US Federal Reserve (Fed) this month. Particularly, US President Donald Trump has threatened to levy taxes on almost all Chinese goods into the US.

Stable market in August

Survey of Dau tu Chung khoan newspaper showed that during the week from September 3rd to 7th, the State Bank of Vietnam (SBV) slightly adjusted the central reference rate, in which the rate was kept unchanged in two sessions compared to the previous session.

On August 31st, the central reference rate was listed at 22,686 dong per US dollar, up by eight dong compared to the end of the previous week.

The spot exchange rate was still listed by the SBV at 22,700 dong per US dollar, while the three-month forward exchange rate stood at 22,775 dong per US dollar. The selling rate was listed at 23,317 dong per US dollar, 50 dong less than the ceiling rate listed in the last session of the week.

Meanwhile the interbank rates were fairly stable during the week. As of September 7th, the exchange rate was 23,300 dong per US dollar, slightly down by eight dong compared to the end of the previous week. On the free market, the exchange rate continued the downtrend recorded in the week ago.

By the end of September 7th, the exchange rate fell by 65 dong on buying rate and 55 dong on selling rate compared to the last session of the previous week, reaching 23,420 dong and 23,450 dong per US dollar.

As estimated, from the beginning of the year until now, the US dollar/dong exchange rate has devaluated by 2.67 percent and Vietnam continues to be among countries recording low exchange rate volatility in the region (together with Malaysia, Thailand, Singapore, etc.).

According to economists, basically, the factors are supporting the stable trend of exchange rate, and the rate even slightly decreased in August as adjusted by the operator, which is consistent with the exchange rate management policy.

Specifically, in addition to maintaining the exchange rate mechanism, the SBV has also flexibly controlled the central exchange rate within a narrow margin in order to create a reference point to guide the market.

“Compared to late July, the central rate in August only increased by nine points, equivalent to an increase of 0.04 percent. In addition, the SBV also sold about 1.2-1.3 billion US dollars to support the market in the first 10 days of August. Thus, the SBV has achieved three objectives: to supplement foreign currency for commercial banks, to widen the gap between dong and US dollar interbank rates by reducing dong liquidity on the market, and to create stability psychology to the forex market”, said Treasury director of a commercial joint stock bank.

The gap between dong and US dollar interbank rates has been maintained at high level. With reference to the Vietnam Interbank Offered Rate (VNIBOR), the interest rate gap has been widened from 0.07-1.09 percent per annum to 2.27 2.13 percent per annum, equivalent to the terms of one-week and one-month.

The cost of holding the US dollar is high, thereby reducing the pressure on the exchange rate. The supply and demand of foreign currency from basic activities of the economy in August were generally more favourable compared to July.

Statistics of the general Statistical Office (GSO) showed that in August, the disbursement of Foreign Direct Investment (FDI) continued to be stable with a total value of 1.4 billion US dollars, while the trade balance recorded a slight deficit of 100 million US dollars. In addition, the foreign currency supply was also supplemented by some major transactions.

On the stock market, the net selling level of foreign investors also decreased, estimated at about 50 million US dollars compared to the 300 million US dollars net sale recorded in July.

At the same time, the pressure on the international market also declined as the currencies in the basket of strong foreign currencies saw no significant fluctuations. The notable point is the slowdown of Chinese yuan’s depreciation under strong intervention of the Public Bank of China (PBoC).

A lot of pressure in September

In the regular meeting in late August 2018, prime minister Nguyen Xuan Phuc sent a message on maintaining macroeconomic stability and a prudent and flexible exchange rate management closely in line with the developments in the international market.

Accordingly, the SBV may continue to maintain the management solutions in August. They are controlling the reference exchange rate and selling rate within a narrow margin, selling foreign currency for market intervention when necessary, managing tight money supply to create appropriate interest rate gap.

In addition, the trade balance of goods is estimated to reach a surplus of about 500-600 million US dollars, the FDI disbursement is expected at 1.9-two billion US dollars, foreign investors are expected to be net buyers again on the stock market when the market recovers, etc. These factors are believed to help maintain the stability of the forex market as what was seen in August, with exchange rate fluctuating within 23,280-23,340 dong per US dollar.

However, there may be the possibility that the exchange rate may fluctuate sharply with higher increase than expected due to the US moves, in which, according to economist Dr Nguyen Tri Hieu, the Fed’s meeting in September is a highlight.

In fact, the Fed is always independent of the US and the agency still tends to curb inflation and tighten monetary policy, hence it will raise interest rates.

“Since the US economy is growing well along with the concerns about inflation, the Fed is likely to increase interest rates in the next meeting (with a probability of 70 percent). This is a move to tighten monetary policy and reduce pressure on inflation”, said Dr Hieu.

Sharing similar view, the above Treasury director said that when the Fed plans to raise interest rates in the upcoming meeting (with a probability of 98 percent), the market awaits signals from the meeting on increasing interest rates for the fourth time in a year.

Accordingly, the US dollar is forecasted to increase by one to 1.5 percent in September. The DXY index will range around 95.5 96.5 points, and the US dollar/Chinese yuan exchange rate will fluctuating around 6.8-6.9 Chinese yuan per US dollar.

In fact, when the Fed raises interest rates, the value of the US dollar will increase, thereby creating the pressure of increasing the dong exchange rate against the US dollar.

This is not Vietnam expects because the country’s goal is to control inflation and create confidence for foreign investors in terms of the stability of dong. Although the exchange rate increase will benefit exports, it will put much pressure on the forex market.

Along with that, the trade war between the US and China is forecasted to escalate to a new level with US President Donald Trump threatening to impose tax on almost all Chinese goods exported to the US, etc.

If Beijing continues to make tough responses like it has done in the recent time, the pressure of depreciation for Chinese yuan will return.

Dr Hieu commented that “The war has not stopped and is even getting stronger. That will surely push up the exchange rate of Chinese yuan. The PBoC also has to deal with this war by letting Chinese yuan to devaluate in order to support exports and offset the US taxation of Chinese goods.

This is a disadvantage for Vietnam, because since April until now, the dong only depreciated against the US dollar by two percent, but Chinese yuan lost up to eight percent against the US dollar, which means that the Chinese yuan depreciated about six percent against the dong a high level in the past four months.

This suggests that the worsening trade war will widen the gap between dong and Chinese yuan, and Chinese goods exported to Vietnam will be cheap, while Vietnamese goods exported to China will be increasingly expensive.

“Although the market concerns has been partly eased after the stable developments of the exchange rate in August, it is clear that the caution continues to be maintained in the context of the rising risks from international pressure. If the tension increases, the risks for supply and demand will come from foreign currency hoarding or the foreign currency credit may stop growing or start shrinking”, the above Treasury director assessed.

 


Category: Finance, Vietnam

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