The USD/VND exchange rate may decrease slightly in 2021

14-Jan-2021 Intellasia | Dien dan Doanh nghiep | 6:02 AM Print This Post

KB Securities Vietnam Joint Stock Company (KBSV) in the report ‘Macro outlook for 2021′ of Vietnam had commented on the evolution of VND/USD exchange rate in 2020 and forecast for 2021.

Specifically, in 2020, Thai Thi Viet Trinh, a macro analyst of KBSV, acknowledged that the exchange rate was stable while the Nominal Effective Exchange Rate (NEER) and the Real Effective Exchange Rate (REER) decreased strongly to the lowest level in the past three years. The USD/VND exchange rate, after having fluctuated strongly in the last two weeks of March 2020, returned to a stable state with the downward trend in the remaining months of the year.

As of December 31, the central and interbank rates decreased by 0.1 percent and 0.3 percent year-on-year (y-o-y) respectively while the black market’s rate increased by 0.9 percent from the begining till the end of the year.

However, the downtrend of the NEER and the REER became more pronounced in the second half of the year. The NEER line had then fallen to the equivalent level in 2017, meaning that the dong had depreciated relatively compared to the basket of currencies. This was a good signal for export activities, but also created operating pressure for the State Bank of Vietnam (SBV) when the dong had been assessed as currency manipulation.

The main reason for the stable USD/VND exchange rate in 2020 and the devaluation of NEER and REER was the clear downward trend of the US dollar in international markets.

Specifically, after skyrocketing by more than eight percent between March 9 and 20, the US dollar index had then plummeted to its lowest level in four years, thanks to monetary easing policies of the Federal Reserve (FED) and fiscal assistance packages.

In addition, SBV had actively bought and increased foreign exchange reserves over the past year, partly blocked the decline of the USD/VND exchange rate on the interbank market and helped the dong devaluate relatively compared to other currencies in the basket of eight reference currencies, especially with currencies such as Chinese Yuan (CNY), euro ( euro ), and Japanese Yen (JPY). SBV then had to change its exchange rate management policy after having been accused of manipulating the currency by the US.

Accordingly, from December 31, 2020, SBV stopped listing spot rates at the Exchange and stopped buying foreign currencies for spot. Besides, from January 4, 2021, SBV would buy foreign currencies for six-month term (instead of three-month term as before) with a cancellation rate of 23,125 VND/USD.

Each credit institution could cancel only once and the entire transaction value for each sale of foreign currency to SBV had to be under this plan.

Previously, SBV had also lowered the spot rate at the Exchange from 23,175 VND/USD to 23,125 VND/USD.

2021 exchange rate forecast

In the report, KBSV believed that the USD/VND exchange rate in 2021 would decrease slightly. Accordingly, the dong in 2021 would increase by 0.5 percent to 1 percent in the context of a positive supply of foreign currencies and a depreciation of the US dollar, along with the SBV’s efforts to remove the label of money manipulation.

Foreign currency supply was assessed to remain plentiful in 2021, when import export activities and the foreign direct investment (FDI) inflows were expected to flow strongly to Vietnam. The International Monetary Fund (IMF) had forecasted that global trade volume would increase by around eight percent by 2021. With a growing share of global exports, Vietnam would certainly benefit from the global trade recovery. The disbursement of FDI was also expected to be positive thanks to the production shift and the effectiveness of the Covid-19 vaccine.

The trend of the US dollar was tilted much to the downside in 2021 thanks to the following signals.

First, optimism about the Covid-19 vaccine helped investors shift their attention to risky assets, instead of a haven currency like the US dollar, causing demand for the dollar to fall.

Second, the transition of the US government in early 2021 with the takeover of the Democratic administration would increase the ability to maintain expansionary monetary and fiscal policy in the US.

Third, the FED’s dovish stance, at least until the end of 2021, and the FED’s shift to medium-inflation targeting meant that the real interest rates could remain negative, the yield curve could be steeper, and the US dollar would become weaker.

The dong was under pressure to increase prices from the accusation of manipulating the currency of the US. The dong would continue to be under upward pressure in 2021 when the currency manipulation criteria for the May 2021 review period was evaluated and showed that Vietnam still violated all three criteria, KBSV’s expert said.

Thus, unless Vietnam successfully negotiated with the US Treasury in the coming period, Vietnam’s currency manipulation mark would be maintained in the next evaluation period. Meanwhile, the SBV’s moves to change the foreign exchange management policy showed that the authority had and would no longer actively intervene in the one-way foreign exchange market. In turn, the dong would be regulated according to the supply-demand of the market.

 

Category: Finance, Vietnam

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