The foreign exchange (forex) market has experienced the second quarter (Q2) with many fluctuations. However, there are favourable signals for the stable trend of the US dollar/dong exchange rate in Q3.
After a stable period, in Q2 2019, the forex market recorded strong fluctuations. Specifically, the US dollar/dong exchange rate increased by 0.84 percent in just five weeks since the end of April, peaking at 23,360 dong per US dollar (banks’ exchange rate). Nevertheless, in June, the dong had a significant recovery when the US dollar/ dong exchange rate continuously decreased with a total decline of 0.43 percent in the whole month.
Accordingly, the exchange rate at banks dropped by 100 dong per US dollar to 23,260 dong per US dollar (buying rate) and 23,380 dong per US dollar (selling rate). The central reference rate was adjusted up and down alternately, ending June at 23,066 dong per US dollar, only increasing by one dong per US dollar compared to the end of May.
Overall, in the first six months of the year, the US dollar/dong exchange rate increased by 0.41 percent, while the central rate increased by an addition of 1.06 percent from the end of 2018 to the end of June 2019. Notably, the State Bank of Vietnam (SBV) purchased more than eight billion US dollars, raising Vietnam’s national forex reserves to the highest level ever. Compared with some countries in the region such as Philippines, Malaysia, Singapore, etc., Vietnam is in the group of countries with stable domestic currency.
According to senior leader of Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), the factors affecting the exchange rate in Q2 tended to be less favourable compared to Q1. Firstly, the pressure from international environment increased. The US China trade war unexpectedly reversed from a state of postponement to escalating tension when the two sides announced new duties for each other since early May.
“This development has had a strong impact on both international and domestic forex markets, with the US dollar/ Chinese yuan exchange rate sharply rose by three percent in just one month to the highest level since the beginning of the year, reaching 6.96 Chinese yuan per US dollar. In the context when China is the largest import market of Vietnam, the depreciation of the Chinese yuan has put strong pressure on dong,” said BIDV’s leader.
Secondly, the basic foreign currency supply and demand of the economy is not necessarily bad, but it is less favourable than the period of huge surplus in Q1. If the Foreign Direct Investment (FDI) disbursement still maintained a good speed at around five billion US dollars (up by 10 percent in the same period of 2019 compared to 2018), the trade balance in Q2 shifted to a deficit of about 1.4 billion US dollars, in the context when the export growth slowed down with difficulties from items such as phones, electronic components, or raw products such as rice, coffee, and cashew nuts. As estimated, the difference between foreign currency supply and demand in Q2 2019 was 1.1 billion US dollars, inclining to the foreign currency supply. This number is lower than the huge surplus in Q1, which was about seven billion US dollars.
Thirdly, the US dollar/dong interest rate difference in the market tended to decrease slightly. The interest rate difference tended to narrow by about 100 points, fluctuating around 0.5 1.5 percent per annum while it was popular at 1.5 2.5 percent per annum on one-week term in Q1. The low cost of holding US dollars is a resonant factor that put pressure on the exchange rate for some times, particularly in late April and early May.
“US dollar mobilisation in Q2 increased by about three percent compared to the end of Q1, showing that the foreign currency hoarding tended to return, and market sentiment became more cautious. On the free market, the US dollar/dong exchange rate closely followed the US dollar/dong exchange rate on the interbank market with an increase of about 0.5 percent compared to the beginning of the year,” said a deputy general director of a bank based in the South.
Many favourable factors for the stable trend in Q3
Talking with reporter of Dau tu Chung khoan, a director of a bank said that “In Q3, the exchange rate will be stable around the current level of 23,300 23,600 dong per US dollar. The SBV is still buying foreign currency and unlikely to let the exchange rate rise too significantly.
A study by the Research team of BIDV showed that the balance of foreign currency supply and demand in Q3 may be more positive than Q2 with the trade balance forecasted to be improved and see a surplus of about 1.5 billion US dollars, thanks to the contribution to export activities of the FDI group, typically the new product lines of Samsung such as Galaxy Note 10. Meanwhile, the FDI disbursement is expected to maintain a positive speed, reaching 5.5 six billion US dollars.
Particularly, the Foreign Indirect Investment (FII) is said to possibly be exciting again with the sale of international bonds of some banks. Vietnam Prosperity Commercial Joint Stock Bank (VPBank) has successfully mobilised 300 million US dollars (equivalent to more than 7.1 trillion dong) through the issuance of three-year international bonds under the consultancy of BNP Paribas, JP Morgan and Standard Chartered. The bonds’ nominal interest rate is 6.25 percent per annum, are distributed to Asian and European investors with the rate of 52 percent and 48 percent, respectively. Tien Phong Commercial Joint Stock Bank (TPBank) also has a plan to issue 200 million US dollars of Tier-2 international bonds in 2019. If it is favourable, these transactions may supplement about 500 to 700 million US dollars of foreign currency to the market.
In addition, the pressure from the international market on the exchange rate may be reduced, because the US and China are expected to return to the trade negotiation after the leaders’ commitment to not increase taxes in the meeting at G20 conference. Speaking at the hearing before the US Congress on July 10th, Chair of the US Federal Reserves (Jerome Powell) said that in the past month, there have been more data showing that the global economy is weakening and there was no sign that the job market is getting too hot. The Fed is getting ready to cut interest rates by about 25 points in the end of July, for the first time in a decade.
BIDV’s study stated that “the dong/US dollar interest rate difference is expected to remain stable at a positive level, with one week fluctuating around 0.7 1.2 percent. Market sentiment is forecasted to be stable with less worries in the context when international pressure is predicted to ease. On the other hand, Vietnam’s macroeconomic context will remain sustainable with stable growth, low inflation and continuous foreign currency inflows, which are the core factors helping the domestic forex market not suffer significant fluctuations as in the middle of last year. We assess that the forex market in Q3 2019 will see many favourable factors to maintain a stable trend from the beginning of the year.”
