The USD/VND upswing will level off in 2H22

The difference between local VND and the global USD shrank to negative levels, occasionally falling to-1.2 percent for the overnight period.

>> State Bank of Vietnam faces pressure on exchange rate

As a result of a shaky global economy and strong demand for the US dollar as a safe haven currency, the interbank rate jumped to 23,282 (2.1 percent YTD) at the end of June. Geopolitical tensions between Russia and Ukraine, as well as major central banks tightening monetary policy to combat inflation, drove the DXY index to 104,738 points (9.5 percent YTD), raising concerns about an impending economic downturn.As a result, to augment the foreign currency supply on the market, the State Bank of Vietnam (SBV) has regulated the exchange rate flexibly and steadied it through the sale of foreign currency. The SBV has reportedly sold between 11 and 12 billion USD through three-month USD forward contracts, according to KB Securities' calculations.

Additionally, the difference between local VND and the global USD shrank to negative levels, occasionally falling to-1.2 percent for the overnight period, which increased pressure on the USD/USD exchange rate as the demand for USD grew. In order to increase the interbank interest rate, reduce the interest rate differential between the Vietnamese dong and the US dollar, and lessen the need for USD ownership in the system, the SBV restarted the treasury bill channel with a large volume by the end of June after nearly two years of being frozen (the total value of the bills in circulation was VND107,640 billion).

>> Vietnam’s FX market remains stable in volatility

Vietnam's exchange rate is under pressure from a stronger USD. The USD index reached 108.5 points as of July 12, 2022, marking its highest peak in 20 years. In the interbank market, a stronger US dollar raises the USD/VND exchange rate by around 2.4 percent annually (0.4 percent monthly). The free market USD/VND exchange rate increased by 0.8 percent mom (2.6 percent ytd), while the SBV set exchange rate for the pair was 23,183, up 0.3 percent mtd (0.2 percent ytd).

VND is still one of the most stable currencies, nonetheless, when compared to regional ones. Since the start of 2022, the majority of regional currencies have depreciated by more than 5% in relation to the USD, notably the Philippine Peso (-10.6%), Thai Baht (-9.2%), Malaysia Ringgit (-5.1%), Chinese Yuan (- 5.9%), and Indonesian Rupiah (-5.1 percent vs. USD).

The real effective exchange rate (REER) and the nominal effective exchange rate (NEER) both increased significantly during this time. On June 30, NEER climbed by 4.74 percent year to date, and REER increased by 3.53 percent (in line with the VND appreciation against a basket of currencies of trade partners). While REER climbed only marginally because domestic CPI in the first half of the year was lower than that of peers, NEER increased mostly as a result of the significant USD appreciation.

"In contrast to the time period of 2015–2016, when the REER line officially crossed the 106 threshold, the SBV modified the VND depreciation to protect exports from adverse effects. However, because of the considerable inflationary pressure in the second half of the year, we think the SBV will continue to work to stabilize the VND", said Mr. Tran Duc Anh.

The second half of 2022 will see the VND supported by a number of factors, according to Mr. Dinh Quang Hinh, analyst at VNDirect, including increased FDI inflows, an improving trade surplus (expected to reach about USD7.2 billion in 2022), a positive balance of payments, and high foreign exchange reserves (equivalent to 3.5-4.0 months of imports). Thus, the second half of 2022 will see a slowdown in the upward trend of the USD/VND. By the end of 2022, the USD/VND exchange rate would remain between 22,900 to 23,300, representing a gain of no more than 2% over the end of 2021.