Vietnam dong increases unexpectedly against US dollar

Increase in remittances

In November this year, the US dollar climbed to a 16-month high when the US announced its highest inflation rate in the last thirty years. At one point, the US Dollar Index (DXY) measured the dollar volatility with six other key currencies, namely, EURO, JPY, GBP, CAD, SEK, and the CHF. At the session on 3 December, the DXY index continued to hold at a high level of 96.15 points. At the beginning of 2021, this index was only at 90.535 points. Normally, a stronger US dollar leads to devaluation of currencies of other countries, especially the developing countries. However, the Vietnam dong is one of the few currencies in the region that has appreciated against the US dollar since the beginning of the year, which is a rare case in the foreign exchange market.

Since 2001, the Vietnam dong has always depreciated against the US dollar in nominal terms, averaging about 2.5% per year. By 2020, something unexpected happened when the Vietnam dong increased slightly by 0.2% against the US dollar. In the first half of 2021, the exchange rate stabilized around VND23,000 to VND23,100 per US dollar, but in the second half of the year, the US$/VND exchange rate continued to follow a downtrend, meaning that the Vietnam dong showed increase.

In a recent interview, Mr. Ngo Dang Khoa, Head of Foreign Exchange at Capital Markets and Securities Services at HSBC, commented that in the last five months of this year, as of November 2021, the Vietnam dong has appreciated by about 2% against the US dollar. The USD/VND exchange rate on the inter-bank market has fallen sharply twice, to VND22,750 per US dollar in August and to VND22,650 per US dollar in early November. This corresponds to the State Bank of Vietnam twice lowering the buying price of the US dollar. This is also the lowest exchange rate in the last five years.

The most plausible reason for the Vietnam dong to appreciate is that the demand for foreign currency is not large enough, while the supply of foreign currency is quite abundant. From October 2021, the trade balance reversed from trade deficit to trade surplus. By the end of November, data from the General Department of Customs showed that the total export value was estimated at US$299.67 bn, up by 17.5%, and the total import value was estimated at US$299.45 bn, up by 27. 5%. Accordingly, the balance of trade in goods in last eleven months is estimated at a surplus of US$225 mn. At the same time, the Foreign Direct Investment Capital (FDI) registered in Vietnam as of 20 November 2021, includes newly registered capital, adjusted registered capital, and the value of capital contribution and share purchase by investors. Foreign investors amount reached US$26.46 bn, up by 0.1% over the same period last year, while realized FDI capital in last eleven months is estimated at US$17.1 bn.

This year, Vietnam received a substantial flow of remittances. According to the State Bank of Vietnam branch in Ho Chi Minh City, the amount of remittances to the City in the last eleven months is estimated at US$6.2 bn and for the whole year they are estimated from US$6.5 bn to about US$6.6 bn. On a national scale, the World Bank and the international cooperation organization on migrants KNOMAD, forecast that the amount of remittances to Vietnam in 2021 will be US$18.1 bn, ranking 8th in the world and third in the Asia-Pacific region. At the same time, the value of Vietnam's foreign exchange reserves as reported by BIDV Securities Joint Stock Company (BSC), have reached US$105 bn. This is a record high level of foreign exchange reserves in Vietnam.

Pressure on currencies

According to many analysis, the current movement of foreign currency cash flow will help increase foreign exchange reserves and also serve as a foundation and resource for the State Bank of Vietnam to continue to operate proactively and flexibly in the future. Accordingly, the strong trend of the Vietnamese dong against the US dollar will continue to be maintained for the rest of 2021. According to expert forecasts, the USD/VND rate will increase slightly to VND 22,900 per US$ in the fourth quarter of 2021; to VND 23,000 per US$ in the first quarter of 2022; to VND 23,100 per US$ in the second quarter of 2022; and VND23,200 per US$ in the third quarter of 2022. The HSBC research team predicts that in 2022, the USD/VND exchange rate will reverse to VND 23,000 per US$.

It can be seen that despite having many advantages, the pressure on the US$ exchange rate is not small, because the trade surplus this year is very low. After the outbreak of the Covid-19 pandemic, Vietnam lost its net revenue from tourism to the tune of almost US$5 to 6 bn. At the same time, the Vietnam dong may face pressure against a stronger greenback in the international currency market. Currently, the US dollar is standing at a high level. The expectation is also there that the US Federal Reserve (Fed) will tighten monetary policy, and raise interest rates. When the Fed helps in appreciating the dollar, it causes a downward pressure on other currencies, including the Vietnam dong.

One financial expert believes that the risk to the Vietnam dong also lies in the fact that the yuan can reverse suddenly when the Fed narrows quantitative easing due to rising inflation. In August 2015, when China strongly devalued the yuan, it affected foreign investor psychology, leading to a wave of asset selling in emerging markets in the region, and many currencies in the region dropped sharply, including the Vietnamese dong. However, the State Bank of Vietnam still maintains a flexible and proactive exchange rate management policy, but the existing advantages in the supply of the US dollar remain challenging and cannot be ignored, and which are likely to become prominent issues in the coming year.