Prudence for the money game
Prudence for the money game
Foreign exchange markets in the world and Vietnam have experienced unexpected developments in recent times. Amid the abundant supply of foreign currencies, the foreign exchange margin trade leveraging on the interest rate difference between the U.S. dollar and Vietnam dong, if any, should be exercised with prudence.
The central reference rate set by the State Bank of Vietnam (SBV) suddenly dropped by VND17 per U.S. dollar a fortnight ago, the steepest fall since mid-September, sending the exchange rate to VND23,138 per dollar by November 1. In October, the central reference rate also declined by VND16, marking the first month of the dong fall over the past 18 months.
The main reason for the fall is the continuous plunge of the U.S. dollar in the international market, as investors believed that the U.S. Federal Reserve would cut the interest rate for the third time at its end-October meeting, and the scenario came true. The US Dollar Index fell in six successive trading sessions in the week from October 27 to November 1, from nearly 98 points to nearly 97 points, the lowest since mid-July.
In another development, the inter-bank lending rate for the dong has continuously dropped and plunged to a level lower than the U.S. dollar lending rate for some short terms since October 14. Previously, the low dong lending rate could encourage banks to borrow dong and buy dollars for lending at a higher interest rate to earn profit from the interest rate difference as well as from the dollar appreciation. However, the current situation is not favorable for such a strategy.
The U.S. dollar buying and selling prices at banks and on the free market have stood still in recent times, a sign that banks’ dollar speculation trade has not occurred. At Vietcombank, the strongest bank in foreign currency trade, the dollar buying price had remained stable at VND23,145 per dollar in end-October, down by VND15 per dollar from the previous month and unchanged compared with the rate early this year. The dollar selling price was kept by a margin of VND120 at VND23,265 per dollar, up by a slight VND5 from September and only VND20 from the rate at the beginning of the year. Meanwhile, the dollar price on the free market has declined even more drastically, by VND50-70 per dollar versus the price early this year.
Though the dong interest rate has been lower than the dollar interest rate, the margin is still very small, and thus not attractive enough to trigger banks’ dollar speculation. However, if the margin is widened and stays for longer terms, some banks are likely to join the game.
Obviously, import activities are at their peak at the end of the year and may push up demand for foreign currency, as was often observed during the same period in previous years. Furthermore, with the possible stop of the Fed rate cut after three times of reduction this year, the expectation for no more rate cut may help the U.S. dollar to recover from its current low level. Therefore, there are quite a few forecasts that the exchange rate could go up late this year, and so may trigger the exchange rate speculation.
Nevertheless, forecast is only forecast. Reality shows that many investors have suffered heavy losses due to the belief in forecasts. It should be noted that many banks observed a strong fall in foreign exchange trade in the first nine months of this year, and even losses from the trade due to wrong forecasts for developments in the domestic foreign exchange market, leading to inappropriate trading strategies.
Ample foreign currencies
It’s not by chance that many institutions have projected that the dong-U.S. dollar exchange rate rise this year will be lower than targeted or could move flat over the rest of the year. In view of the downtrend of the US Dollar Index since early October, falling nearly 3% from the peak of 100, the exchange rate in the domestic market could hardly go against the trend, especially when the SBV, with its foreign reserves of up to US$71 billion, can intervene any time, if needed.
In addition, the domestic market currently has ample foreign currency supplies. In the first 10 months of the year, the trade surplus increased to US$7 billion, disbursement of foreign direct investment (FDI) capital rose 7.4% year-on-year to US$16.2 billion, FDI through capital contribution and share purchase surged 70.5% from the year earlier period to US$10.8 billion, and overseas remittances this year are estimated at US$16.7 billion by the World Bank, higher than last year’s US$16 billion. Meanwhile, foreign currency demand is not high, as the SBV has restricted the objects eligible for foreign currency borrowing this year.
Notably, a number of commercial banks have received huge foreign funds, further replenishing their foreign currency liquidities. In this context, it’s hardly accepted that banks have increased the dong-dollar rate on the ground of foreign currency shortage, especially when the Q3 financial reports show that most banks have positive forex positions.
On October 30, a source from the National Citizen Bank (NCB) said the bank’s board of directors had met two foreign investors from Japan and Singapore in July and August. Most recently, on October 26, the board had a working session with the investor from Singapore. The two foreign investors want to buy NCB’s shares in its new issuance to raise its charter capital. With this information, more than 14.4 million NCB shares worth VND131 billion on the Hanoi Stock Exchange was suddenly net bought by foreign investors in the November 1 trading session, equivalent to 3.5% of the bank’s total of more than 406.8 million shares in circulation on the market.
On October 31, the Bank for Investment and Development of Vietnam (BIDV) announced the completion of the sale of more than 603 million shares, equivalent to 15% of its charter capital, to South Korea’s KEB Hana Bank, earning more than VND20.2 trillion (over US$870 million).
On November 1, the board of directors of Vietcombank approved the plan to divest capital from the life insurance company Vietcombank-Cardif (VCLI). Vietcombank holds a 45% stake in VCLI and BNP Paribas Cardif a 55% stake. Earlier in late September, it was known that FWD would sign an agreement to pay Vietcombank US$400 million over a long-term insurance distribution deal with the bank, with FWD to purchase VCLI as part of the deal.
MB Bank has plans to sell a 7.5% equity stake to foreign investors over the rest of the year. According to the bank’s leaders, they expect to sell the stake to one or more foreign investors, and those investors are not necessarily strategic investors.
Apart from equity share sale, some banks have attracted foreign funds through foreign currency bond issuance. In mid-July VPBank successfully sold US$300 million worth of bonds. In late August, SHB Bank said it had plans to issue US$500 million worth of international bonds. Lately in mid-October, SeABank said it was asking shareholders’ opinions about the issuance of US$400 million worth of bonds on the international market. Earlier in June, TPBank also had plans to issue US$200 million worth of bonds.
