Stabilising the exchange rate of USD/VND

31-Oct-2018 Intellasia | VnEconomy | 6:00 AM Print This Post

Recently, the online exchange rates quotation of the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) showed a difference, even though it has not been a common change for the whole market.

The gap between the selling and buying price of US dollar of Vietcombank increased to 100 dong, instead of almost fixed for many years (under normal conditions) at only 80 dong.

In the previous exchange rate fluctuations, banks often increased the gap between selling and buying price to reflect the short-term price fall risk, or when they do not want to purchase foreign currency at high price.

At the presence, with the uncertainty of whether the exchange rate will cool down in the future or not, the US dollar/dong exchange rate is under impacts of many factors. However, the more noticeable point is that the market sentiment is likely to get used to the change.

In fact, in the last two weeks, the world market has fluctuated sharply, while the US dollar/dong exchange rate has been quite stable; market sentiment did not as panic as it used to which was expressed very strongly and clearly in the sensitive points that be focused on when analysing the US dollar/dong exchange rate, including: price movements of the US dollar, the Chinese yuan, the US bond yield, the Federal Reserve’s (Fed) rate raise plan, etc.

In June, the US dollar-Index jumped to 96 points from the quite stable level of 93-94 points. This caused a certain “panic” in the market, and the exchange rate of US dollar/dong was quickly moved.

Similarly, the pair of US dollar/Chinese yuan was stable around 6.3-6.4 points, and then jumped to 6.7-6.8 points as the result of the strong decline momentum of the Chinese yuan, which was also the starting point of the surge of US-China trade war.

With Vietnam, and with the US dollar/dong exchange rate in particular, the US dollar price movements and especially the plunging of the Chinese yuan has had great effects in recent years and clearly showed the impact (also in terms of market sentiment) in the period from June as mentioned above (in addition to the effects of Fed’s raising interest rates, or US bonds yield exceeding three percent, then 3.2 percent, etc).

However, it seems that the Vietnam market sentiment has also been used to the new ground. Over the past two weeks, despite that these factors were very volatile, the US dollar/dong exchange rate was stable at a high benchmark.

Specifically, in the past two weeks, the US dollar-Index fluctuated strongly, rising from 94 points to higher than 96.6 points; US 10-year bond yields surpassed 3.2 percent and then cooled down; in particular, the Chinese yuan had a very strong week of movement against the US dollar, dropped to a record low of 6.96 points last week.

Meanwhile, the US dollar/dong exchange rate was at the familiar range around 23,390 dong/US dollar quoted at the commercial banks, even barely fluctuating in the past week. However, this does not mean that the US dollar/dong exchange rate has been immunised to changes.

With such big fluctuations of external factors, it is observed that the US dollar/dong exchange rate in the interbank market in the middle of October till now equalled to the listed reference selling price by the Transactional Office of the State Bank of Vietnam (SBV), which means that the US dollar price on the interbank market has reached the point which requires for intervention.

In fact, SBV has sold out US dollar to stabilise the market. Accordingly, the stability of the US dollar/dong exchange rate, in the context of many changes, was thanks to the intervention of the operator.

From 6th June 2018, when the US dollar/dong exchange rate began to rise and fluctuate, there were two times that SBV made intervention. Some points can be noted about the flows of foreign currency.

Firstly, the flow of foreign currency in Vietnam tied to national foreign currency reserves which is two-way, buy and sell.

In this respect, Vietnam has intervened to stabilise the exchange rate, but not to devaluate the dong which is noted in US protectionism that has emerged today; strong currency devaluation is often for the purpose to support and stimulate exports, while Vietnam is currently a strong net exporter into the United States.

Secondly, the intervention has “buy side and sell side” with the huge net purchase of foreign currency reserves in the last two years.

The overall balance of Vietnam’s recent two-year trade surplus was much lower than the total amount of foreign currency purchased by SBV in the same period. This shows that a large amount of foreign currency has been transformed in the population, from borrowing.

Accordingly, a relevant point to note is foreign currency credit. Businesses borrowed in foreign currencies, sold them for dong to use as capital for operations, this source of foreign currency contributed to the net purchase volume before.

Over time, when loans are matured, demands for foreign currencies for repayment impacted the balance of supply and demand in the market. This balance is associated with foreign currency credit with more exchange rate risk from the middle of the year. In fact, foreign currency credit is on the decline trending in many commercial banks.

Thus, the movement of foreign currency credit is related to US dollar/dong exchange rate and the balance of supply and demand in the market. SBV has directed to minimise the impact of this relationship by gradually narrowing the foreign currency credit.

Since last year, the policy to narrow and gradually limit foreign currency credit has been set out. Every year, SBV considers issuing a new circular relating to this issue which is applicable for that year only.

There are two months left for this year. It is expected that SBV will soon have a policy on foreign currency credit, so that businesses can actively follow, before the termination of the earlier circular.


Category: Finance, Vietnam

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