USD/VND exchange rate increased sharply in the last days of April, as a large supply of foreign currency was not poured into the market as expected. However, the exchange rate is likely to stabilise again in May.
In the last 10 days of April, the USD/VND exchange rate in the interbank market has soared from 23,200 dong to 23,300 dong, establishing the highest price since the beginning of 2019. The increase of 100 points, equivalent to nearly 0.5 percent, is not significant, but it is a sudden shift compared to the same period of previous years.
Since 2016, when the State Bank of Vietnam (SBV) moved to apply the operating mechanism by the central exchange rate, the exchange rate has always remained or decreased in April as the supply constantly exceeded the demand in the market. That excession is reflected in the surplus trade balance and the foreign direct investment (FDI), which is not impressive but quite average, disbursed over one billion dollar in April.
On the whole, from 2010 to present, there has been only two years of exchange rate increase in April. The increase of 100 points looks quite modest in April-2019 but it has been the biggest wave in a decade. So what is the driving force behind big movement of exchange rate in recent days?
In terms of macro balance, the supply and demand of foreign currency was still stable, reflected by SBV’s continued purchase of foreign currency in April. But the problem lied in the overconfidence of the banking system. In the first half of April, commercial banks were very active in selling foreign currency to SBV, even when the foreign currency position of the whole system turned negative. If it was positive, then selling foreign currency could be interpreted as handling the excess amount of foreign currency. But when it was negative (there was no foreign currency available) and commercial banks still sold foreign currency, this was clearly short-selling move (sell first and wait to buy again at lower prices in the future).
They confidently sold such foreign curreny in anticipation of a large share purchase, promising to inject billions of dollars into the market in April. However, when the market was impatiently looking forward, Korean investors suddenly refused to confirm the information about the invesment amount of one billion US dollar in a Vietnamese enterprise. So frustration was raised at its peak and anxiety began to spread throughout the market. As a reminder, commercial banks accepted to hold a large negative position of foreign currency (sometimes up to 600 million US dollar) due to the expectation of a large supply coming. That supply, then, turned out to be temporarily unavailable; they had to buy it to close the negative position. Therefore, the rising exchange rate was almost inevitable.
While the market was worried, a number of other sub-indices also added pressure on the USD/VND exchange rate. As a result, the wave of increasing 100 points in the interbank exchange rate became quite understandable.
There are two scenarios for the exchange rate including establishing a new ground and stabilising again as in the first quarter of the year. The latter seems to become more feasible in May. Firstly, the system’s supply and demand of foreign currency is still stable. Even in April, the supply was dominant and the exchange rate increased only because commercial banks sold foreign currency to SBV a little “too much”.
Trade balance data in the next period are forecasted to be relatively positive and the first two weeks of the month is usually the time when FDI enterprises sell foreign currency to have dong for the payment of expenses. Demand for large foreign currency also often does not arise in May, meaning that the system’s foreign currency postion is expected to soon return to a balance, even positive.
Secondly, US dollar is showing signs of cooling down in both free and international markets. As of the beginning of May 3, the US dollar Index was trading around 97.2, down more than one percent in less than a week. The free USD/VND exchange rate also dropped significantly to around 23,300 dong.
Thirdly, the difference between interest rates in dong and US dollar is expected to increase again in early May. With SBV’s re-issuance of treasury bills at the end of April, the excess of dong will be reduced and the difference between the interest rates in dong and US dollar in the overnight term is likely to return to 1-1.5 percent instead of zero percent as in the last week of April.
Thus, there is the possibility that the interbank USD/VND exchange rate will be calm again in this May. It is difficult to say if it returns to 23,200 dong, but we may have to wait a long time for the re-emergence of 23,300 dong on trading screens.
