Exchange Rates Stir up

The interbank exchange rate announced by the SBV was VND20,733 per US dollar, the highest since April 19, marking the ninth rise in a row. In reality, the interbank exchange rate always goes after that at commercial banks. For many straight days before that, the exchange rate was always quoted at the upper limit. After the central bank revised up official rates, commercial banks followed step. Vietcombank and Vietinbank quoted their exchange rates at the top limit of VND20,940 per dollar (ask) and VND20,935 (bid). Other banks also did the same. However, real exchange rates are reportedly getting farther officially quoted rates.

 

Unlike its tough action with deposit interest rate, the central bank remains slack in forex management. Whenever the demand exceeds, the officially quoted rates only serve as a source of reference while the real value is much higher because buyers have to pay extra fees for their dealings. Although the SBV has not admitted this situation, the business community meets with it daily.

 

Generally, the demand of companies for foreign currencies rise and the exchange rate usually goes up. However, this year, the primary culprit is gold. During the past one month, world gold prices tend to cool down and domestic demand for the precious metal jumps, thus creating a big gap between domestic and international prices. The central bank assigned five banks to sell gold to stabilise the market. In the context that US dollars appreciate, it is impossible for gold traders to buy the greenback at quoted rates. An official from Saigon Jewellery Company (SJC) said gold price cannot be based on officially quoted exchange rate to calculate but the free rate because gold traders have to buy dollars at free exchange rate.

 

Gold impacts on forex rate are undeniable. On October 6 - the first day banks sold gold to stabilise the market, the USD/VND exchange rate climbed VND105. Banks and SJC have sold some 10 tonnes of gold valued more than US$600 million. Thus, banks and SJC need a huge amount of dollars for their intervention into the bullion market.

 

With a huge demand from gold traders, exchange rate hikes at commercial banks usually go ahead of the black market - a contrary to the past.

 

Gold is attributed to the primary cause of exchange rate hike. Gold investment is now in fashion because other investment channels like real estate and stock market are hardly profitable and investors lack the trust in the stability of local currency. The soaring demand for the greenback pushed up the exchange rate at banks to VND21,700 per dollar, VND50 higher than the free market.

 

It is widely known that citizens and businesses difficultly buy US dollars from banks when exchange rates tend to rise fast. Quoted rates are worthless when companies have to pay extra fees for their deals. Although interbank exchange rate has been revised up for nine straight times, the current value fails to catch up with market developments. According to the current ruling, the spread - the difference between the interbank exchange and quoted rate at commercial banks - is capped at 1 percent from the interbank rate. This means that, with the interbank exchange rate at VND20,733 per dollar on October 19, banks are not allowed to buy or sell above VND20,940 per dollar. In reality, many companies have to buy the greenback at VND21,700, higher than the black market by VND50-100.

 

As the demand for dollars surges, banks naturally hike buying prices. With buying prices exceeding the upper limit, selling prices are pushed up as a result. In truth, the foreign exchange rate is moving on market rules although it has not officially recognised. As soon as information is not made public and transparent, misconducts will appear.

 

As a rule, the demand for dollars surges at year’s end because companies need the currency to settle payments. In couple with impacts from gold, the USD/VND exchange rate tends to go up further. Worse still, the amount of inward dollars increases insignificantly from last year. This requires the central bank to take regulatory actions to prevent the fever from going out of control.

 

The central bank’s policies to previous dollar fevers were considered “jerky” and forex investors, especially speculators, easily anticipated the trend and stepped up a move ahead to take the margin. This behaviour led to instability on the market. Recently, the central bank revised marginally and this prevented investors from “treading water.” According to financiers, the SBV will continue making small changes to exchange rates. However, the “bullish” sentiment inflamed by expectations of a rising trend may encourage citizens and businesses to hoard the greenback and this will intensify the dollar fever. Given good policies from the central bank, the USD/VND exchange rate will be kept below VND22,000 per dollar.