How will the USD/VND exchange rate fluctuate in H2-2021?

USD/VND rate over the past time

A rise in the unofficial exchange rate

The USD/VND interbank exchange rate was generally flat and decreased slightly in 2Q, reflecting an abundant supply of USD thanks to the continued growth of remittances and FDI, making up for the current trade deficit in May and June. While buying foreign currencies has not been promoted as the State Bank switched from buying USD on spot to buying futures with a decreasing frequency from daily to weekly. For the whole second quarter, the USD/VND interbank rate decreased by 0.25% from 23,065 to 23,010.

Meanwhile, the unofficial exchange rate surged in 2Q, contrary to the slight downtrend of the interbank rate. According to KB Securities, there are two main reasons. First, the domestic - international gold price stayed high (at many times, the basis increased to VND7 million/tael), leading to skyrocketing demand for smuggled gold on the unofficial USD source. Second, the appreciation of the USD in the international market after the Fed sent out less dovish messages than expected in the June meeting, had a strong impact on investor sentiment on the unofficial market (although the supply and demand for foreign currency remained stable on the interbank market). The unofficial USD/VND exchange rate in 2Q increased 2.6% from 23,240 to 23,850.

SBV to slash the USD buying price

On June 8, 2021, the State Bank of Vietnam (SBV) announced to slash the buying price for USD from VND23,125/USD to VND22,975/USD. This price is applied to foreign currency purchases with a term of six months. This is the largest USD price adjustment in more than a year. KB Securities assessed this move of the SBV comes from two main reasons. 

First, the previous weakness of the USD caused the value of VND (pegged to USD) to decrease sharply compared to the basket of currencies of trading partners (shown by the falling REER and NEER), leading to inflation risks in the context of rising commodity prices. The appreciation of VND would help neutralize the above risk.

Second, the increase in foreign currency purchases and the addition of foreign exchange reserves are no longer so urgent when Vietnam's foreign exchange reserves are already higher than the standard level according to the IMF scale. The currency shortage from the US still exists, the lowering of the foreign currency purchase price partly reflects the view that the SBV will be more limit   ed in buying foreign currencies compared to the previous period.

The supply of USD should remain ample thanks to FDI inflows and remittances...

Exchange rate outlook in H2

KB Securities forecasted the exchange rate should remain stable in the last six months when the supply and demand for USD continue to be stably low. Specifically, the supply of USD should remain ample thanks to FDI inflows and remittances, while the recent actions of the SBV (strongly lowering the buying prices of USD) switching from buying foreign currencies for spot to buying for a six-month term show that it will limit    the amount of USD purchased compared to the previous period. The trade balance, despite having a trade deficit in all three months of 2Q, is expected to soon turn to a surplus when exports accelerate again, given domestic enterprises have imported enough input materials to boost production for 3Q orders.

The risk of an increase in the exchange rate may appear in the scenario that the Fed could announce the reduction of the monthly asset purchase program (QE), sending out signals about accelerating interest rate hikes under inflationary pressure during the Jackson Hole conference in August or in the September policy meeting, said KB Securities. If this happens, USD is likely to rise again and reverse the downtrend that started at the end of March last year, which will put more depreciation pressure on the VND. However, at the moment, KB Securities believes this case is unlikely as inflation in the US is only temporary and will soon cool down shortly without the Fed’s intervene.