Exchange rate sparks debate on volatility
Exchange rate sparks debate on volatility
The State Bank of Vietnam’s central exchange rate adjustment has reignited conversations about potential volatility in the currency market.
As of last week, the central exchange rate was posted at VND24,017 per USD, narrowing the gap to the peak of VND24,700 recorded in 2022. This represents a notable increase of VND146 since the year’s commencement.
The commercial banking sector mirrors this trend, with the exchange rate hovering at historically high levels. For instance, Vietcombank’s rates span from VND24,510-24,850 per USD for buying and selling, respectively, marking a 1.8 per cent climb since the year began.
Economic experts, both within Vietnam and abroad, attribute this fluctuation to the enduring strength of the US dollar, fuelled by the US Federal Reserve’s decision not to lower interest rates contrary to prior expectations. This scenario prompts investor anxiety over potential repercussions on macroeconomic stability and investment flows in the Vietnamese stock market.
Tran Hoang Son, VPBank Securities’ director of Market Strategy, offered insights at last week’s seminar hosted by VIR.
“Since the year began, we’ve witnessed the exchange rate’s upward trajectory resuming. The free market rate even surpassed the VND25,000 threshold, with the interbank exchange rate also climbing swiftly,” Son said. “A fluctuation beyond 2.7-3 per cent could instigate an adjustment phase in the stock market. We observed this in 2022, a year marked by significant exchange rate hikes and intensified selling activity by investors, both domestic and foreign.”
Son pinpointed three pivotal factors influencing the current exchange rate scenario: the substantial interest rate differential between the two currencies, the disparity in gold prices prompting a surge in gold imports, and the recent trend of foreign investors scaling back their stakes in the Vietnamese stock market.
Looking ahead to 2024, Son shared an optimistic perspective, underscored by anticipated policy adjustments from the State Bank of Vietnam (SBV) and the government.
“Indicators to watch include a potential mid-year interest rate cut by the Fed, which could narrow the interest rate differential and alleviate pressures,” he asserted. “The government’s impending regulatory adjustments to the gold market aim to balance supply and demand, potentially easing exchange rate tensions.”
Prof. Nguyen Huu Huan from the University of Economics in Ho Chi Minh City observed that exchange rate pressures on the VND in the first half of this year were inevitable. Despite these pressures, Huan pointed out a silver lining.
“The depreciation of the VND remains significantly lower compared to the currencies of countries like Thailand and South Korea. Many currencies in the Asian region have depreciated by 3-5 per cent since the end of last year,” Huan said.
He attributed part of this trend to the post-holiday reduction in remittances to Vietnam, which had spiked at the year’s end, possibly leading to a temporary imbalance where demand surpasses supply.
Looking ahead, Huan conveyed an optimistic forecast for the currency market.
“Unlike the tensions of 2022, this year’s exchange rate dynamics are expected to align more closely with the patterns observed in 2023. We might see short-term spikes beyond 3 per cent, potentially up to 4 per cent, but the rate should gradually stabilise to an annual fluctuation around 3 per cent,” he explained.
This stability is anticipated due to Vietnam’s continued trade surplus and encouraging signs from foreign direct investment flows, indicating that any exchange rate tensions would likely be ephemeral.
“Should exchange rate pressures intensify, the SBV has the option to slightly adjust interest rates upwards to ensure stability, signalling a proactive stance towards maintaining exchange rate equilibrium,” Huan added.
Aligning with broader financial perspectives, economist Nguyen Tri Hieu said that the USD will retain its strength on the international market until the Fed commences interest rate cuts. “Thus, I believe a potential cooling of exchange rates in the latter half of 2024. Currently, the USD price remains under control. Moreover, in the present context, the SBV still has ample leeway to intervene in the case of significant exchange rate fluctuations,” he stated.
KBSV Securities assesses that despite ongoing exchange rate pressures, particularly amid unresolved geopolitical risks, the situation does not pose a significant threat to Vietnam. “We believe that domestic exchange rates will continue to be well-supported by a robust influx of foreign investment and remittances,” it noted.
