Will exchange rate movements at the end of the year stay stable?

VND has appreciated

Monitoring the foreign currency market movements shows the VND/USD exchange rate has been stable and fluctuated around a narrow band during the first six months of 2021, with a fluctuation of only 0.2-0.4% and there has been no stressful period.

According to a report by SSI Securities Company, in the first six months of 2021, the State Bank of Vietnam (SBV) did not make any spot foreign currency purchases even though the current account was likely in deficit, VND was up 0.4% against USD while most regional currencies fell (THB -6.9%; INR -1.7%; SGD -1.8%; PHP -1.6%).

According to the macroeconomic report of MB Securities Company (MBS), domestic USD supply and demand is quite stable, while the USD has remained in a weak state since the beginning of the year, so the exchange rate pressure is negligible. In addition, the domestic foreign currency market is still mainly self-regulating and has not yet made a move to sell a large amount of USD by the regulator   to intervene in the market.

The most notable event for   the domestic foreign currency market is the reduction of the listed exchange rate of USD by the State Bank of Vietnam on the SBV's Exchange from June 8, 2021. Specifically, the direction of buying USD has fallen by 150 VND, to 22,975 VND/USD.

Banking and finance expert Dr Nguyen Tri Hieu said this move is inevitable when the VND has appreciated against the USD, while the world USD index is experiencing a large decrease due to the US government pumping a large amount of money into circulation. Therefore, the State Bank must keep the VND/USD exchange rate stable and also needs more actions in management, cannot continue to increase the exchange rate even though this will create advantages for   exports, to limit     the possibility that the US will once again put Vietnam on the list of currency manipulators as recently.

Continued stability

Source: SSI

Taking advantage of favourable market conditions and an abundant supply of USD, the SBV continued to buy USD to thicken the foreign exchange reserves. It is estimated that foreign exchange reserves at the moment are about 100 billion USD, creating more favourable conditions to keep the exchange rate stable. However, according to MBS, the intensity of buying USD has decreased significantly compared to 2020 as the SBV wants to control the amount of VND injected into the market.

In addition, according to experts, throughout 2020 and the first six months of 2021, the US Federal Reserve (FED) lowered interest rates to 0%, and at the same time injected a huge amount of money into the financial market through bond purchases. The strong money injection moves of the Fed have reduced pressure on VND as well as other currencies of emerging countries.

Therefore, MBS believes the SBV will let the VND depreciate slightly against the USD in 2021 depending on market conditions. However, the SBV must still balance the two macro stability and export support goals, so there is no incentive to devalue or   increase the VND too strongly if it is not under pressure from inflation or   the world economic environment.

In addition, despite the trade deficit in the first half of 2021, SSI experts believe remittance flows and disbursement of foreign direct investment (FDI) are still quite positive, which should be enough to cover the deficit. Balance of trade in goods and foreign currency credit also increased, so supply and demand of foreign currency remained quite balanced. As a result, the USD/VND exchange rate will move sideways in the short term and may decrease slightly towards the end of the year.

Experts of Mirea Asset Securities Company expect the exchange rate to remain relatively stable thanks to factors such as: the expectation that the trade balance will gradually return to surplus when exports accelerate again; FDI inflows continued to be positive; flexible foreign currency supply and demand regulation mechanism of the State Bank; the dollar is not expected to strengthen due to large-scale economic stimulus packages and the Fed's policy to support the economy.

Thanks to the still solid macro context and a fairly stable supply of USD, experts say Vietnam's foreign currency market will still be stable, avoiding shocks affecting firms' production, business, and import-export activities.