Analysts of SSI Retail Research at Saigon Securities Incorporation (SSI) has released a report on the currency market in May with statements showing that the currency market is having clear changes. The report mentioned that May is the second consecutive month the State Bank of Vietnam (SBV) net injected into the system. However, the net injection fell significantly compared to April from 58.6 trillion dong to 10.9 trillion dong. The volume of bills in circulation fell to 55.8 trillion dong. Issuing bills remained the main tool that SBV used to regulate liquidity in the past year, in the context of good liquidity status.
The interbank rates were more stable in the beginning of May but increased again in the second half of the month, especially on short terms. In particular, the overnight rate rose to 1.6 percent, the highest level recorded since the Lunar New Year. The further decline of banking liquidity continued to affect the bond issuance of the State Treasury. The State Treasury had to strongly raise the bond yields, especially on 10-year and 15-year tenors by 16 basis points (bps) and 13 bps, pushing the secondary bond yields to significantly increase. The volume of bond issuance improved in May but after the first five months of the year, the State Treasury has only completed 29 percent of the annual plan with a total issuance value of 57.6 trillion dong.
Overall, liquidity of the banking system is not yet a matter of concern, but experts at SSI Retail Research believed that it is necessary to monitor the new factors arising including trade deficit and the capital withdrawal trend of foreign investors. The trade deficit in May was estimated at 500 million USD, marking the return of trade deficit after months of trade surplus. The increase of net selling by foreign investors possibly involved the capital withdrawal in emerging markets due to the interest rate hikes of the US Federal Reserve.
When the foreign currency supply declined, the amount of dong (VND) injected to buy US dollars (USD) also fell, affecting the supply of VND and banking liquidity. In addition, the deposits of the State Treasury could not be kept for long in the banking system. The bottlenecks in terms of mechanism and procedures in the public investment will sooner or later be unfrozen to have the source for socio-economic development.
The pressure of rising exchange rate in late May led to a strongest fluctuation since beginning of the year. The USD Index rose by 7 percent from the bottom level of 2018 to 94.8 points, pulling the USD/VND exchange rate to surpass 22,800 dong threshold to 22,880 dong per USD, up by 80 dong just within a week, 0.64 percent higher than the beginning of the year.
The slight increase of the US to 2 percent made the 10-year US government bond yield to significantly rise to 3.11 percent, the highest level in nearly seven years. However, after meeting minutes in May showed that the Fed may control inflation target at around 2 percent, the market concerns seemed to cool down. The 10-year bond yield fell below 3 percent but the USD value remained high.
Most major currencies depreciated against the USD, in which the euro ( euro ) dropped by 6,7 percent since its peak set in 2018, British Pound (GBP) dropped by 7.4 percent and Japanese Yen (JPY) dropped by 3.4 percent. The emerging currencies also heavily suffered as the risk of capital being withdrawn to the US is very high along with the Fed’s interest rate increase process and the growing global risk.
The Brazilian Real (BRL) continuously plummeted and lost 11.2 percent since the beginning of the year although the country has regained positive growth after years in recession. The Russian Ruble (RUB) and Indian Rupee (INR) also fell by respectively 7 percent and 5.3 percent. In the group of BRIC countries, only Chinese yuan (RMB) maintained an appreciation of 1.99 percent against the USD.
Other Asian currencies such as Korean Won (KRW), Indonesian Rupiah (IDR) and Philippine Peso (PHP) also depreciated. In such context, the slight devaluation of VND still helped Vietnam to outperform other countries in the region.
The domestic exchange rate is currently still supported by many factors. With record high foreign exchange reserves of 64 billion USD, according to experts, the SBV can make intervene into the market when necessary. In fact, the SBV has adjusted the central reference rate to 22,566 dong per USD on June 1st. That is considered a clear signal for the market and it immediately led to a 40 dong decline in exchange rate to 22,840 dong per USD. However, SSI Retail Research said that, similar to banking liquidity, trade deficit and indirect capital flows are the unknowns of the foreign exchange market which require to be closely monitored in the near future.
