There seems to be no reason for rate changes

24-Sep-2020 Intellasia | Dau tu Chung khoan | 6:02 AM Print This Post

The State Bank of Vietnam (SBV) might not need to change the exchange rate at the moment when foreign exchange reserves were still high, and trade balance continued to be in surplus, while the US dollar interest rates were still stable at a low level.

The dong pressure was relieved

Referring to the exchange rate issue, Le Quang Trung, deputy general director of Vietnam International Commercial Joint Stock Bank (VIB), said that it was necessary to evaluate the current macroeconomy as the balance of payments, the balance of import and export was very positive.

Recognised in the market, the supply of foreign currency in August was at a very generous level, mainly thanks to the positive development of import and export activities. According to data from the General Statistical Office, the export turnover in August reached about $26.5 billion, up 6.5 percent since the month before Samsung boosted the export of new Note 20 products to the world market. Meanwhile, imports grew more slowly, reaching about $23 billion, bringing the trade balance to a record surplus of about $3.5 billion.

According to Nguyen Duc Hieu, deputy general director of Sai Gon Joint Stock Commercial Bank (SCB), being an outsourcing country, Vietnam would reduce exports and imports simultaneously, but agricultural products were exporting very well. Thus overall, there was a surplus. Besides, cash tended to flow into Vietnam because central banks worldwide had injected money, and Vietnam was an attractive investment destination.

The Asian Development Outlook (ADO) 2020 update report of the Asian Development Bank (ADB) announced that the Japanese Foreign Trade Organisation had announced a list of 15 Japanese enterprises that would change location from China to Vietnam, most of which produced medical equipment and the rest were manufacturing semiconductors, phone parts, air conditioners or power modules.

In addition to the favourable domestic factor, the pressure from the international environment on the exchange rate was also low. According to the Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV)’s analysts, although there were individual concerns about the second wave of the Covid-19 outbreak or tensions between the US and China, the dominant sentiment in the market remained optimistic about the resilience of the global economy, as well as the prospect of a successful vaccine preparation soon. Therefore, the weakening of the US dollar continued to be the main factor driving the market in August.

In fact, as of the end of August, the US dollar value measurement index (DXY) had dropped about 1.5 percent to about 92 levels. The reason was that the US Federal Reserve (Fed) would change the goal of operating monetary policy from being based on a hard inflation target (two percent) to a more flexible mechanism than medium inflation. This forced the Fed to maintain monetary easing status for a long time, even when inflation exceeded two percent. Therefore, most major currencies increased in August, such as euro (+1.5%), JPY (+2.36%), CNY (+1.9%), KRW (+0.39%).

It was estimated that the favourable foreign currency supply-demand balance had helped SBV buy about $3.5 billion from commercial banks in August the highest level since early January 2020, BIDV senior leaders share.

What was the reason for the exchange rate change?

Le Quang Trung calculated that each month, Vietnam imported about $21 billion, divided each week at about $5 billion. According to the International Monetary Fund (IMF), if a country had foreign exchange reserves equivalent to 12 weeks 14 weeks of imports, that country would have enough foreign reserves. Thus, foreign exchange reserves for 14 weeks of imports of Vietnam must be at least $70 billion. Therefore, the current reserve of about $92 billion, which was expected to reach $100 billion in the next time, was in line with reality and showed that this was a legitimate purpose, not distorting the value of dong.

From a market perspective, Nguyen Duc Hieu said that SBV did not need to change the exchange rate. Even if the dong might get more robust, the agency still had to buy foreign currencies to increase foreign exchange reserves, support partly for further dong interest rate reduction.

There was no reason to change the exchange rate because the US dollar interest rates at overnight, one-week terms tended to move sideways at a low level of 0.1 percent to 0.3 percent per year. The average trading value per session in August reached about 27 trillion dong, increasing by about four percent compared with the previous month’s average and about 10 percent higher than the same period last year. Transactions were still concentrated mainly in the overnight, one-week period (accounting for about 90 percent of the total transaction volume).

Factors affecting the US dollar tended to support the stability of the interest rate level. Specifically, the LIBOR US dollar interest rate on the international market remained at a low level with the overnight, one-week term at around zero percent to 0.18 percent per year. Meanwhile, the liquidity of the US dollar in the country was abundant when the difference between the US dollar deposits and loans remained at the highest level for many years.

It was expected that in September, the interbank US dollar liquidity would maintain a stable trend with an average interest rate of around 0.1 percent to 0.3 percent per year for the overnight, one-week terms and 0.8 percent to one percent per year for the three-month term when the factors, in general, did not change much compared to the previous month, a senior leader of BIDV forecast.

According to this leader, in September, the USD/VND exchange rate was forecasted to maintain a stable momentum, fluctuating in a range of 23,175 dong to 23,190 dong per US dollar. The most important supporting factor for the exchange rate would still be the favourable development of the domestic foreign currency supply from the main components of import-export and the foreign direct investment (FDI) disbursement.

Accordingly, the balance of supply and demand of foreign currencies was forecast to continue the surplus of about $1.5 billion to $2 billion, creating conditions for SBV to add about $1 billion in foreign exchange reserves. Besides, the weakening trend of the US dollar due to reduced risk aversion and the Fed’s long-term loosening point of view also helped to remove the pressure on the dong in the near future, he said.

Regarding exchange rate issues, talking to the Securities Investment Newspaper, Nguyen Minh Cuong, chief economist of ADB, said that, except for a short fluctuation in early April 2020, the value of the dong in the year then could remain stable due to the weakening US dollar and the widening trade surplus of Vietnam due to lower domestic import demand.

Comments made based on economic data such as the trade surplus or the exchange rate between dong and the US dollar was currently at a minimal difference of 0.01%, Cuong shared.

Trung said that the dong would be stable in the short term based on the following factors. Vietnam still had a trade surplus, inflation was controlled, economic growth was positive, and there were many opportunities to join production networks, price chains of global governance.

The above factors would help the dong to remain stable in the short term, Trung emphasized.


Category: Finance, Vietnam

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