Exchange rate under the control despite Fed rate hike
Exchange rate under the control despite Fed rate hike
After the Federal Reserve (Fed)’s move of increasing the key USD interest rate by 0.25 per cent up to a range of 0.75-1 per cent, the exchange rate on the domestic market is under control. However, Huynh Trung Minh, a financial and banking expert, told VIR’s Van Linh that enterprises should be proactive in exchange rate risk hedging.
What is your viewpoint on the development of VND/USD exchange rate after the Fed’s adjustment?
As forecasted, the Fed has recently raised the federal funds rate to 0.75-1 per cent and is predicted to have other future hikes in 2017. The next increases are expected in June and December this year. Given the increase of 0.25 per cent, the VND/USD exchange rate has showed slight fluctuations.
In addition, with the aim of stabilising exchange rates, the State Bank of Vietnam (SBV) said it would sell foreign currency and ensure the legitimate demands of individuals and businesses. Therefore, the exchange rate will be under the control. The VND’s depreciation will be controlled at around 1-2 per cent, thanks to the stable economy, record high foreign currency reserves ($40 billion) as well as the flexible monetary policies. The listed exchange rate at various banks decreased after the USD interest rate increased.
What pressure will the upward trend of the greenback exert on the VND/USD exchange rate?
The US economy is expected to have better growth under the leadership of the new president, which will impact the USD. As noted by Fed chair Janet Yellen, the changes in economic policy under the Trump administration might impact the Fed’s future interest rate adjustment plans. The upward trend of the USD price is expected to continue in the medium and long terms.
The market expects Donald Trump’s policies in increasing spending and reducing taxes to boost the economic growth and stimulate inflation. Therefore, they think the interest rate will rise in the future and this will result in strong support to the USD in the upcoming time and putting pressure on the VND/USD exchange rate.
Not only Vietnam, most countries throughout the world have to deal with exchange rate fluctuations. However, the exchange rate increases due to various factors, primarily the seasonal factor. In addition, there are some other reasons, including concerns over the fate of the Trans-Pacific Partnership Agreement or the continuous increases by the Fed. But the SBV has already prepared large foreign exchange reserves. In other words, the pressure of exchange rate increase is existing but under control.
What should companies do to prevent exchange rate risks?
Normally, the year-end exchange rate increases are of cyclic nature, when the payment for foreign partners is due, driving up the demand for foreign currencies. Therefore, enterprises should proactively hedge exchange rate risk via purchasing foreign currencies in future contracts. In other words, this is a kind of exchange rate fluctuation insurance.
Under the current context, in your opinion, are USD or VND holdings more profitable?
In the short term, people who want to send their children studying abroad or seeking healthcare services would do better to keep their money in foreign currency.
If there is no demand, switching to VND reserves will be more profitable. Specifically, in case of depositing VND2 billion at a bank, customers will receive more than VND10 million each month and about VND130 million for the whole year. In contrast, if holding USD since the beginning of the year, they would make only VND tens of millions.
Many people worry about lacking foreign currency and are flocking to purchase more. This is a favourable opportunity for speculators pushing the price on the black market. In all eventuality, there is little reason to panic.
