In the interbank market, the exchange rate after falling by about 50-60 dong per US dollar to around the bid rate of the State Bank of Vietnam (SBV) (23,175 VND/USD) in the first 10 sessions in March has increased again to 100 150 VND/USD, up to 23,300-23,350 VND/USD in the following four sessions to set the highest level since the beginning of the year.
Assessing a number of factors affecting exchange rates in recent sessions, some noticeable movement signals can be seen in the direction of pressure on exchange rates.
Firstly, the USD/VND exchange rate in the free market is on a sudden increase trend: The exchange rate in the Over-the-counter (OTC) market has increased sharply by about 300-400 USD/VND in just two days March 16 and 17, up to 23,530-23,630 USD/VND, thereby widening the gap between free and interbank exchange rate to about 350-400 USD/VND.
Although there is no official statistics, this movement might stem from the increase of gold imports because domestic gold prices are quite cheap compared to the world (about 3-4 million dong per tael).
In addition, a number of border gates in the North such as Dong Quan, Thanh Thuy, Tan Thanh cleared from customs clearance with China also contributed to boosting the demand for foreign currencies in the free market in the short term.
Second, the pressure in the international foreign exchange market increases: the Covid-19 epidemic is spreading widely in European countries and the US, leading to the fluctuations of the international foreign exchange market.
The US Dollar index (DXY index) increased by 2.5 percent in just one week, leading to a downward trend of currencies against US dollar, such as euro (-1.9%), CNY (-0.6%), KRW ( 4.7%), and THB (-2.1%). Although the US Federal Reserve (Fed) has accelerated the pace of monetary easing with two times of urgent interest rate cut recently, but the US dollar is still maintaining strength as a safe currency in the context of the US economy continues to show positive compared to some other economies such as the EU or China.
Thirdly, market sentiment has shifted from steady state to being cautious and concerned: The context of risks from the international environment has increased, the stock market has dropped sharply (foreign investors net sold up to five trillion dong in 25 consecutive sessions) and the domestic environment also appears to be unstable (the increase of Covid-19 cases), which has negatively affected market sentiment and indirectly put pressure on exchange rates.
… But the level will not be large
It can be seen that the factors that increase the pressure on the exchange rate have appeared, the most prominent is the sudden increase in the difference between the world and domestic gold price (up to over three million dong per tael), dragging the upward trend of exchange rates in the free market.
In the past, when the exchange rate between the free and interbank market exceeded $100/VND, the exchange rate on the interbank market was often under great pressure and now the difference is over $200/VND.
The high gap between domestic and global gold prices will probably be maintained for a short time and then decline again soon when the supply has been added from imports, while gold has not really attracted strong investment cash flow. Combined with psychological factors, the exchange rate is likely to experience more pressure to increase than decrease in the second half of March.
However, this pressure is not expected to be too large in the context that the exchange rate is still supported by some basic factors: (i) Supply and demand of foreign currencies of the economy are expected to continue to be positive when trade balance in the second half of March may have a surplus of about $500 million; (ii) The difference between VND-USD interest rates in the interbank market is expected to remain quite high (one-week term around one to two percent per year), thereby limiting the need to hold US dollar in the market. Based on that, the interbank exchange rate is expected to fluctuate in the range of 23,250-23,350 USD/VND.
From now to the end of the year, the group of risk factors for the exchange rate has become increasingly clear, namely the possibility of the world economy’s recession, the supply of foreign currencies to reduce the abundant level or the prudent psychology.
In general, the base scenario for the exchange rate this year is still relatively stable, but the volatility will be stronger than in 2019, around one to two percent.
