Will the pressure on exchange rates ease?
The pressure on VND may ease up, leading VND/USD rates to fluctuate between 25,300 and 25,700 by the second half of 2024.
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>> USD/VND rate might rise by 5.3% by the end of 2024
Outlook for FED rate cuts
The DXY index has quickly rebounded from 104 thresholds at the start of June to its current level of 105.9 (an increase of 3.7% since the beginning of the year), driven by recent release of US macroeconomic data, which signals a sturdy economic performance: the US S&P Composite PMI Output index in June nudged up to 54.8 - the highest level since April 2022, new orders received by private businesses increased to 53.4, a measure of employment rose for the first time in three months. Under these conditions, the Fed reduced its interest rate cut projection to a single 25 basis point (bps) drop in 2024 and a total of 100 bps next year.
However, many investors still believe there is a 65% possibility that the Fed will begin a rate-cutting cycle in September, with approximately 50 basis points reduced this year. This projection is based on the decline in US inflation. The June CPI, a broad measure of expenses for goods and services, fell 0.1% from May, bringing the 12-month rate to 3%, its lowest level in more than three years. In May, the core PCE index rose 2.6%, the weakest rate since March 2021. This is likely to force the Fed to decrease interest rates sooner than predicted.
Fed Chairman Jerome Powell reiterated in recent testimony that the bank will not wait until inflation in the United States falls to its 2% target before cutting interest rates. "You don't want to wait until inflation is all the way down to 2%," he said, adding that if you wait that long, you'll probably be too late since inflation will be heading lower and will fall well below 2%, which we don't want.
The majority of economists polled by Reuters now believe the Fed will lower interest rates from their current range of 5.25% to 5.50% in September, with another drop expected later in the year.
"With both inflation and the job market easing, we believe the door is wide open for the Fed to begin reducing interest rates. We anticipate the US central bank will use the FOMC meeting at the end of the month to signal that it is willing to reduce at the September meeting if the data continues on its current path. This implies that the US dollar will continue to weaken—we predict the DXY index to fall to 103-104 in the next days," stated UBS.
>> The USD/VND rate is still under strain
The exchange rate will go down
The quick increase in the DXY index in June put further pressure on the VND/USD exchange rate, making it more difficult for the SBV to maintain stability.
However, SBV's efforts, such as issuing T-bills and selling foreign currency to withdraw money from the market (as of June 25th, SBV has sold approximately USD 5.5 billion since the end of April to manage the exchange rate, and this amount is expected to rise further in the coming period), have had a significant impact on the exchange rate this month. The interbank USD/VND rate climbed marginally to 25,459 as of June 27th, representing a 4.5% rise from the beginning of the year. The free fx market rate remains at 25,990 VND/USD, while the central rate is at 24,260 VND/USD, up 5% and 1.7%, respectively, since the beginning of 2024.
MBS believes the pressure on VND will loosen up, and expects VND/USD values to fluctuate between 25,300 and 25,700 in the second half of 2024. Supportive factors for VND include a positive trade surplus (US$10 billion in 6M24), net FDI inflows (U$10.8 billion, 8.2% yoy), and a rebound in foreign tourist arrivals (58% yoy in 6M24). The macroeconomic situation is expected to remain stable, with additional development serving as the foundation for exchange rate stabilization in 2024.
Furthermore, the Fed's rate cut projection might have a negative influence on the US dollars causing the DXY index to fall in the coming months. This also reduces pressure on VND.