Throughout its history, Vietnam has had a thin foreign exchange reserve, with the goal of buying foreign currencies and increasing this resource set permanently.
In those decades, the first big purchase was recorded in 2007, and then in early 2008, the State Bank of Vietnam (SBV) had to issue 20.3 trillion dong of compulsory bills to withdraw money because of concerns about inflation. But the method of purchase and the purchase price then did not shape the fixed or any pattern for later.
In recent years, especially after the central exchange rate mechanism (from the beginning of 2016), the activity of trading foreign currencies has been more regular. Since then, the buying price in US dollars that SBV has listed has become a “floor” in the interbank market.
Even in the case of operators deploying forward derivatives, the market has never recorded the USD/VND exchange rate in the interbank market to penetrate that “floor”.
But, recently, reports of some market participants show that the USD exchange rate among members repeatedly penetrated the 23,200 dongthe price that SBV’s Transaction Office bought, even completely down to 23,192 dong.
The phenomenon of exchange rate across the “historical floor” became familiar. The remaining question is why it falls below that mark, and SBV only buys foreign currencies in moderation?
The direct impact on rates is interest rates. In August, VND interest rates in other markets tended to increase. This development is like an adversity.
Also in August, preliminary statistics showed that 19 central banks in the world reduced interest rates; including big banks like the US Federal Reserve (Fed), or close and quite similar in trade competition in some Asean countries.
Last week, the second largest economy in the world, was also an adjacent market where Vietnam had a large trade deficit, was injected a large amount of money when the People’s Bank of China decided to lower the compulsory reserve as a relaxation move.
In Vietnam, compulsory reserves for many years have not been usedin terms of adjustments. Part of the pressure has been the lowest in many years. On the other hand, the operator has a taste for regulating the quantity, is cautious in using traditional tools and often has the weight such as compulsory reserves and executive interest rates.
So is the interest rate. The operating rates and interest rates in the open market in Vietnam stood still in the above context.
Even with the above adversity, especially when many currencies in the world, especially the yuan plummeted, interest rates in Vietnam increased, leading to the appreciation of the Vietnamese currency, the exchange rate reflected that point.
Relating to the above phenomenon, why is the interbank exchange rate still “crossing the floor”, how does SBV change the buying taste and the limited amount of dong offered? Normally, when the operator buys a large amount of foreign currency and buys it evenly, the supply of copper will radiate and seep into the market to stabilise and even crush interest rates.
In case of excessive foreign currency supply, the buying operation can use derivative products, buying futures to relax and still drive the interbank exchange rate at the target point.
Or, in the end, SBV knows how the foreign currency is sold. For example, the sale may lead to a large negative status in some members who are in the shortage of dong, so they limit buying.
In any case, as above, the interbank exchange rate still has “cross-floor” sessions. In the adversity of the interest rate hike, the executive had to use administrative measures as a written recommendation to members about the last mobilised interest rates.
2019 is gradually different. If 2017 and 2018, when the economy showed signs of difficulties or economic growth slowed down, the government has repeatedly asked to relax credit growth targets or request measures to reduce interest rates. This year, those requests and requirements have not been put forward like before.
Instead, at the recent Standing Committee of the government, the message was given: this year is likely to be completed, exceeded the plan of 12/12 socio-economic development targets. Or at the regular meeting in August last week, the government estimated that GDP growth this year would reach the high level.
With such information, the macroeconomic fundamentals are still good, especially put in the “adversity” factor compared to the surrounding (many countries have reduced interest rates, depreciated local currency to support exports and trade competition), without emphasising the need for monetary policy adjustments.
Of course, interest rates and exchange rates must be harmonised with many other balances, but stability may be the preferred option. As the SBV leader has previously compared, managing monetary policy on demand to ensure multiple goals is like dancing at the same time to different music.
