Concerns over Rising Exchange Rate

 

The dollar/dong reference fixing on the interbank market was VND21,890 per dollar on August 19, 2015, an increase of 1 percent from the previous VND21,673 per dollar. With the new trading band of 3 percent, the dong can move between VND22,547 and VND21,233 per dollar.

 

The decision to raise the interbank exchange rate to 3 percent broke the central bank's commitments to cap the growth within 2 percent this year. Besides, the SBV also widened the daily trading band to 3 percent. In reality, the regulatory upper limit can be raised to 6 percent.

 

Immediately after the SBV's decisions, commercial banks started to announce new ask/bid spreads. Exchange rates at commercial banks approximated to the upper limit. Notably, LienVietPostBank quoted the ask rate at VND22,500 per US dollar, an increase of up to VND450 from the previous trading session. In the free market, the buying price was VND22,420 per dollar and the selling price was VND22,520 per dollar.

The rise in exchange rate helped weaken the desire to hoard dollars for higher exchange value in the future. On August 19, the interbank market value approximated US$2 billion, a sharp rise from daily value of US$500-600 million after the dong devaluation on August 12.

 

The market needs more time to find the point of balance and stability. Nevertheless, the bottleneck on the foreign exchange market has been significantly widened. On August 19, the market was very vibrant when the supply of foreign currencies was abundant. This showed that the policy had eased the yearning for dollar hoarding, evidenced by market liquidity. Strong capital inflows reflected the satisfaction level of the market, inversely proportional to the extent of foreign currency hoarding and defence.

 

A research report released by SHBC Bank said, "After the adjustment, the greenback immediately increased more than 300 points, peaking at VND22,420 before the selling pressure weighed up, pushing back the exchange rate to VND22,350- 22,380 per dollar. Liquidity improved. Late in the day, the buying force increased on the interbank market, the exchange was sent back to the range of VND22,390 per dollar. The market sentiment is cautious.”

 

With a large supply from commercial banks, if the market liquidity continues to improve and exchange rate soon finds an equilibrium point, the greenback kept by companies will soon find ways into the market. The new level of exchange rate needs time to take shape when companies overcome their current defensive mentality.

 

After China suddenly devalued its currency, the yuan, against the US dollar, the market sentiment was weakened on fears of potential impacts caused by the US Federal Reserve's interest rate hike. The SBV's move aimed to lead the market and prepare for potential adverse impacts of international markets.

 

According to the SBV, with two new adjustments, the dollar/dong exchange rate will have more room for responding to unfavourable developments on international and domestic markets, not only until the end of this year but also in early 2016.

 

A meaningful message from the SBV said that the decisions on exchange rate increases provide enough room to cope with adverse changes until early 2016. This can be interpreted that the regulator will not make new changes in the coming time because the double adjustments on August 19 are "big enough". Moreover, the exchange rate tends to rise towards the end of the year. The SBV's announcement clearly mentioned this matter.

 

In its message, the central bank explained its main reasons: To prepare for the interest rate hike by the US Federal Reserve (Fed) rather than cope with Chinese yuan devaluation. This helped relieve the "wait and see" attitude to the exchange rate to be hiked after the US Fed's decision to raise interest rate.

 

The SBV's decisions on dong devaluation by 3 percent and widening of the forex trading band to 3 percent were supported by domestic and international financial experts. In fact, compared with currency depreciations in other countries in the region in the year to date, the dong devaluation was much lower. Malaysian ringgit depreciated 14 percent and Indonesian rupiah weakened 10.5 percent in the year to date.

ANZ Bank assessed the SBV move positively. The lender's report said, "The policy action today is positive in its promptness in response to China’s yuan devaluation. In a pre-emptive move, the central bank may have taken into account a possible interest rate hike by the US Fed in September.”

 

ANZ said that the Vietnamese dong has been one of the more resilient currencies amidst emerging markets in Asia where currencies have declined in recent months. The dong could depreciate by a maximum of 5.1 percent this year versus annual depreciation of around 1.3 percent in the previous two years.

 

In the first seven months of 2015, Vietnam's trade deficit reached US$3.53 billion, compared with a surplus of US$1.59 billion in the same period of 2014. In the seven months, Vietnam's exports expanded 8.9 percent, lower than the target of 10 percent set by the Government. Weaker yuan has fanned concerns over trade balance.

 

China's currency devaluation stirred up Vietnam's forex market. The dollar/dong exchange rate climbed 1.3 percent amid volatile market sentiment, weak market liquidity, growing foreign currency hoarding and more requests for premature payments from customers.

 

Dollar demand was pushed up by speculative moves. Commercial banks continued to narrow their negative state of foreign currency holdings and some reported a positive state. Demand by banks was huge as they needed to fill up the gap. Companies also rushed to buy foreign currencies. Currently, loans in foreign currencies value some US$25 billion. If companies want to prematurely pay 20-30 percent of loans, their demand value will amount to US$5-7.5 billion.