The November capital market report of Saigon Securities Incorporation (SSI) Research showed that the interbank interest rates sharply rose in the second half of November while the US dollar interest rate fell by about 25 basis points after the third interest rate cut of the US Federal Reserve (Fed) in the end of October which caused the dong/US dollar interest rates to increase strongly from approximately zero percent to 2.4 percent per annum.
In addition, the international economic context has been stable, the US dollar/Chinese yuan exchange rate dropped to around seven, thus the US dollar/dong exchange rate at bans declined by 10 dong per US dollar to 23,110/ 23,260 dong per US dollar. The difference between the buying and selling rates was kept high at 150 dong per US dollar.
Thus, the buying rate of banks at the end of November was 55 dong less than the end of 2018, equivalent to a decrease of 0.24%. Meanwhile, the seasonal factor caused the free exchange rate to inch up by 60 dong per US dollar to 23,240/ 23,260 dong per US dollar, equivalent to an increase of 0.26 percent compared to the previous month but still 0.13 percent less than the end of 2018. Except for May and June which recorded sharp rise of exchange rate because the trade war escalation made the Chinese yuan to decline, the buying rate of commercial banks was always equal or lower than the buying rate of the SBV which was 23,200 dong per US dollar. Thanks to that, the SBV acquired a large amount of foreign currency and raise the foreign exchange reserves to a record high level of 73 billion US dollar, equivalent to about 14 weeks of import. Commercial banks also increased profit from foreign exchange activities.
On the last trading day of the month, the SBV lower the buying rate by 25 dong per US dollar to 23,175 dong per US dollar. According to SSI Research, the attraction of foreign currency to the SBV may decline, indirectly pushing the supply of foreign currency to stay in the market during the end of the year peak period. At the same time, this move signals a flexible policy management not only for market members but also foreign agencies when assessing Vietnam’s exchange rate management policy.
In the last month of the year, there are many factors putting intertwining impact on the exchange rate. In addition to complicated developments from outside and inside of the country, the high foreign currency demand to serve the needs of goods import and export, the strong decline of trade surplus, and the less abundant foreign currency status of commercial banks due to the sale of a large amount of foreign currency to the SBV will put pressure on the exchange rate. However, in the opposite direction, the extended gap of dong/US dollar exchange rate on the interbank market, the remittance and foreign currency flows from business cooperation and capital selling transactions will still positively support to stabilise the exchange rate. The US dollar/dong exchange rate in the end of 2019 is likely to be lower or equal to the exchange rate recorded in the end of 2018, marking a successful year of the SBV’s exchange rate management.
In fact, the stabilisation of the exchange rate in 2019 reflects Vietnam’s positive macro fundamentals but also causes the dong to appreciate in relation to major partners. Since these countries are still expanding the scale of monetary loosening, and their domestic currencies will continue to decline in 2020, there will be certain advantages for Vietnamese goods in the long run if the dong maintains its valuation.
According to SSI Research, considering the overall context and the balance between Vietnam US trade relations, the adjustment of the dong in 2020 (if any) will be adjusted step by step depending on the developments in the world.
