More fulcrum appears for the exchange rate

17-Jan-2020 Intellasia | Dien dan Doanh nghiep | 7:02 AM Print This Post

The United State’ (US)’s removal of the ‘currency manipulation’ label for China could cause the USD/CNY exchange rate to move in opposite directions compared to 2019, thereby reducing the pressure on the USD/VND exchange rate.

Extend the string of stable days

Contrary to many years ago, the exchange rate often tended to increase sharply in the days approaching the Lunar New Year due to rising inflation, which led to an increase in the demand for foreign currency holding, especially in the context of people with sufficient cash. However, in recent two to three years, that situation had not disappeared. This year, too, the exchange rate remained calm in the ‘honey year’ despite inflation pressure at this time much more significant than a year ago.

Accordingly, although the central rate was still announced by the State Bank of Vietnam (SBV) daily to increase or decrease, the level of fluctuations was generally minimal. On the morning of January 14, the central exchange rate was listed by the operator at 23,157 dong per US dollar, a slight decrease of 5 dong compared to the previous session, but only increased 2 dong compared to the end of 2018. With a trading band of increasing or decreasing at three percent as at present, the floor rate was 22,462 dong per US dollar, and the ceiling rate was 23,852 dong per US dollar. SBV also adjusted the selling price of the US dollar to 23,802 dong per US dollar, lower than the ceiling exchange rate of 50 VND, while keeping the buying price at 23,175 dong per US dollar.

Meanwhile, the price of buying and selling the US dollar at banks was still almost unchanged for many days. Currently, the buying price of the US dollar in banks is around VND 23, dong per US dollar, while the selling price is around 23,220 dong per US dollar. For example, on the morning of January 14, the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) listed the US dollar transaction price at 23,080 dong per US dollar (purchased) and 23,230 dong per US dollar (sold), unchanged from the previous day. Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) also kept the US dollar selling price at 23,110 dong per US dollar and 23,230 dong per US dollar.

Thus, the central exchange rate was still fluctuating between the buying and selling prices of banks. According to foreign exchange experts, that was a ‘standard’ range showing that the central exchange rate had to be close to the real exchange rate. The central exchange rate close to the real exchange rate would not only improve the efficiency of the primary exchange rate management but also increase the flexibility for banks to have a reasonably broad range to adjust the exchange rate according to developments, said an expert.

In 2019, despite the continually fluctuating global financial markets and the foreign exchange market, the domestic exchange rate was still very calm and the dong was one of the few currencies in the region as well as in the world maintaining stability throughout the year. In the last year, the central exchange rate only increased by 30 dong, equivalent to an increase of about 1.45%. While the US dollar buying and selling prices of banks even decreased slightly compared to the end of 2018. In particular, the SBV also purchased more than $20 billion to raise foreign exchange reserves to a record high of $79.9 billion, double that of 2015.

The fulcrum for exchange rates

Regarding the exchange rate movements in 2020, most experts believed that the pressure on the exchange rate this year would be much higher than the previous year. Firstly, export activities continued to be affected because protectionism was spreading. In particular, the government expected the trade balance this year would have a slight deficit of about three percent of export turnover instead of a surplus of more than $11 billion in the past year (according to the latest statistics of the general Department of Customs, in 2019, trade surplus was nearly $11.12 billion). Secondly, inflation pressure this year was much more extensive. Thirdly, the easing monetary policy in the second half of 2019 would also put pressure on exchange rates and inflation this year.

However, the supply of foreign currency in the economy continued to be plentiful due to the disbursement of foreign direct investment (FDI) capital, merger and acquisition (M&A) activities and remittances, supporting the exchange rate stability. Besides, abundant foreign reserves also increased the ability of SBV to intervene when it was necessary to stabilise the foreign exchange market, the exchange rate beside the central exchange rate management mechanism. In addition, the fear of being labeled ‘currency manipulation’ by the US also made the national exchange rate not fluctuate sharply.

And yet, the US elimination of China from the list of currency manipulation, as well as the fact that the two countries were preparing to sign a first-phase trade agreement, would cause the Chinese Yuan to regain what it lost against the dollar in the last year. US dollar depreciation, while the Chinese Yuan appreciation would also ease the pressure on the domestic exchange rate.

Recalling the beginning of August 2019, after China unexpectedly sharply depreciated the Chinese Yuan to cross the red line of 7 Chinese Yuan per US dollar, the US immediately labeled the ‘currency manipulation’ for this country. This move pushed the Chinese Yuan further down, sometimes trading at 7.2 Chinese Yuan per US dollar, the lowest in 10 years.

The Chinese Yuan devaluation had dragged many currencies in the region down, thereby putting high pressure on the domestic exchange rate because China was one of the leading trading partners of Vietnam. Even at that time, many experts voiced a proposal to devalue the dong to limit the trade deficit from China.

Therefore, if the Chinese Yuan appreciated and the US dollar depreciated, it would be a great prop for the domestic exchange rate to maintain stability this year.


Category: Finance, Vietnam

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