Exchange market pressure could be lower on rising foreign currency reserves

The VND/USD exchange rate held steady in the first quarter of 2023 despite repeated interest rate increases by the US Federal Reserve, worries about an impending recession, instability in the financial system, and instability in the world economy. 

But from the beginning of July, when the State Bank of Vietnam maintained the difference between its monetary policy (lowering interest rates) and that of other central banks, pressure on the exchange rate slowly grew. During this time, the VND is also affected by the time of year when FDI companies send their profits home.

When the exchange rate crossed 24,000 VND/USD and the State Bank of Vietnam hiked the selling price to a record high, there were fears that the regulator would need to balance the market due to the sudden rise in the exchange rate. short-term interest rates to boost VND appeal. 

Many forecasts are inclined toward the possibility that in the short term, the exchange rate will likely continue to fluctuate and increase, making SBV more cautious in maintaining the loosening monetary policy and possibly intervening by sucking the money out. VND in the interbank system, slowing USD purchases for foreign currency reserves or postponing policy interest rate cuts.

"We are wary about the USD's overall trend versus other currencies since the global economy is still uncertain and there are several Fed policy options," said Mr. Vu Binh Minh, CFA, Sales Director of Bonds and Interest Products, Foreign Currency Division, capital market, and securities services, HSBC Vietnam. 

VNDirect's report also stated that "it is necessary to be careful with exchange rate fluctuations in the late 2023 period," when since the beginning of 2023, the VND/USD exchange rate has increased by about 0.5%. 

The exchange rate may be pressured in the second half of 2023 due to the narrowing interest rate difference between VND and USD, as the Fed's operational interest rate may stay at its peak until the end of the year. End of 2023 to limit inflation, while the State Bank continues to decrease interest rates to stimulate the economy; domestic inflation may rise in the third quarter.

Currency rate pressure may be lower than last year since Vietnam will post a record trade surplus, inflation is falling, and foreign currency reserves are rising. As of July 20, 2023, Vietnam had $16.24 billion in foreign investment capital, up 4.5% from the previous year. The first seven months of 2023 saw $11.58 billion in foreign direct investment capital in Vietnam, up 0.8% over the previous year. Remittances to Ho Chi Minh City rose 37% to $4.33 billion by June.

The IMF expects Vietnam's foreign currency reserves to reach $95 billion by 2023. Large capital sales by SHB Bank, Truong Hai Group (Thaco), Vincom Retail, or Vinamilk's next international bond offering will also provide foreign cash for the system.

Meanwhile, the Fed may only have one more rate hike of about 0.25 percentage points before stopping the monetary tightening cycle and starting a new easing cycle at the beginning of 2024. This project will reduce the pressure on the interest rate differential for VND. 

According to VNDirect's forecast, the exchange rate may fluctuate more strongly in the second half of 2023, but the VND/USD exchange rate will fluctuate no more than +/- 2% compared to the beginning of 2023.

Therefore, Dr. Le Xuan Nghia, an economist, said: "It is difficult for the USD to recover, and the State Bank may have more room to reduce operating interest rates further". In particular, although the price of imported materials may increase, especially fuel prices, putting pressure on the exchange rate, the Ministry of Finance still has room to intervene (taxes, petrol fees).