Vietnamese dong weakened amid China's devaluing of yuan

The State Bank of Vietnam (SBV) has promoted its daily fixing to a new high of VND23,064 a dollar in the opening session of May 15, an increase of VND10 compared to the previous day. Last Friday, the daily fixing closed the week at VND23,057 a dollar.

The past week also saw the VND weakened significantly against the USD, with the dollar was traded as high as VND23,460 at state-owned Vietcombank, a jump of VND150 compared to the closing session of the prior week. 

The pair, nevertheless, cooled down a bit at the end of last week, with Vietcombank softened its buy-side to VND23,405 and sell-side to VND23,285 a dollar.

The roller coaster ride of the USD/VND started again on Tuesday this week when the dollar headed to VND23,430 and slightly down to VND23,400 as of today at Vietcombank. 

The fluctuation of the USD/VND has happened following the Chinese yuan felt to its lowest levels against the greenback since last December on Monday, on the back of China imposing the payback tariffs on $60 billion worth of US goods.

“We’ve seen the USD/VND pair being moved in a very volatile fashion, swinging around almost VND200 within less than one month. The pair started to rally from base level of 23,200 all the way to record level of 23,400 on the interbank market, then diving down to 23,280 level then swelling up again to 23,360 level as of now. Meanwhile, the SBV has also constantly set the central rate higher, sending the both fixing and ceiling rates to all-time high,” noted Ngo Dang Khoa, country head of global markets at HSBC Vietnam.

In the first four months of 2019, SBV actively bought some $8.35 billion to fatten its foreign currency reserves and the USD/VND was seen to hover around the central bank’s dollar buying rate of 23,200 for most of the time, thanks to the positive macroeconomic results in the first quarter, low seasonal demands as well as the support from the lack of volatility in the global market.

“However, starting end of April, the market outlook has reversed quite remarkably,” said Khoa.

The volatility of the foreign exchange rate, according to Khoa, was driven by both internal and external factors. Externally, the re-escalation of US-China trade tension continued to drive the market volatility, giving both the offshore and onshore yuan to quickly depreciate to the lowest level in four months, or almost 2-2.5 per cent month-to-date April.

“Meanwhile, locally we see signs of deteriorating trade figures with April trade deficit estimated at $700m despite year-to-date trade balance remains surplus at $700 million and robust FDI data. However, local demands from corporates for dividend payment seasons coupled with higher payment demands also stimulate a weaker dong,” Khoa told TheLEADER.

Using a top-down approach, Khoa noted that the USD/VND has only depreciated about 0.8 per cent year to date. 

Investors, meanwhile, was seen rather comfortable with a stable exchange rate for quite a long time since last year, therefore recent volatility has impacted market sentiment and raised some concerns about the future direction of the currency. 

With a stronger greenback, import might be adversely affected, however export sectors can partially benefit from this. Corporates with anticipated demands should proactively use hedging products to meet foreign payment needs in advance to avoid any disruption in business.

“On expectation of USD/VND movement, it is clear that the pair remains both directly and indirectly impacted by the movement of the Chinese Yuan as well as the US-China trade tension given the fact that both countries remain two of the largest trade partners of Vietnam, while the USD and CNY are in the currencies basket to determine the daily fixing as prescribed by the SBV’s methodology,” he said.

The dong, as such, remains under further devaluation pressure towards the year end with stronger volatility, especially during times when macroeconomic indicators weakened and/or global trade slows down.

“However, there are various reports saying that Vietnam is one of the countries that benefit the most from the US-China trade tension as manufacturers shift production to Vietnam. 

Therefore, it is critical for the country to boost investment scene locally to drive up the sticky foreign flows as well as to improve the country’s economic growth in general,” added Khoa.