HSBC: USD's rally is short-lived

Assessing the USD's weekly increase, HSBC said that the exchange rate fluctuations are only short-term and the VND still has the potential to increase in value again.

After a second quarter of fluctuating in a relatively stable price range, the USD/VND exchange rate on the interbank market in the first half of August jumped from 23,700 - 23,750 to 23,950 - 24,000, equivalent to a 1.2% devaluation of the VND and the highest increase in the past 10 months.

The trading range of the exchange rate pair also witnessed sharp increases in both price steps as well as the width between buying and selling prices. On August 17, the central exchange rate was also set to an all-time high of VND23,951 on August 17.

By August 18, after 4 consecutive increases, the central exchange rate slightly decreased by 5 VND to 23,946 VND. With a 5% amplitude, the USD price allowed to be traded at commercial banks fluctuated between 22,748 - 25,143 VND.

Transaction at a bank on the morning of November 14, 2022. Photo: Thanh Tung

Mr. Ngo Dang Khoa, National Director of Foreign Exchange, Capital Markets and Securities Services of HSBC Vietnam, explained that the increase in USD price last week was largely due to fluctuations in the international market.

With concerns about US inflation not cooling down as quickly as expected while other US economic data still show no signs of recession, US interest rates and the USD Index have increased again. On the other hand, the devaluation of the Chinese Yuan last week has caused other currencies in the region to also depreciate significantly. Facing that trend, the VND is no exception.

Domestically, the contrasting monetary policies between Vietnam and the US also put general pressure on the exchange rate. Slowing domestic growth, rapidly cooling inflation and the stability of the foreign exchange market in the first months of the year have shown that Vietnam's policy priorities are focused on supporting growth.

This is in contrast to the US, where economic data remains positive and core inflation has not cooled to the target level, causing the US Federal Reserve (Fed) to maintain its monetary tightening trend. In the context that the Fed has not completely ended its interest rate hike cycle, the State Bank of Vietnam is one of the first central banks in Asia to cut interest rates to support the economy.

The State Bank of Vietnam has lowered its policy interest rate three times this year, bringing the interest rate gap between Vietnam and the US to a historic high. The interest rate gap is also a factor that creates a mentality of hoarding foreign currency, causing the exchange rate to increase in recent times, according to Mr. Khoa.

However, assessing the exchange rate trend in the coming time, HSBC believes that the sudden fluctuations are only short-term. "Although the existing pressures on the exchange rate mentioned above are relatively clear, in the medium and long term, the dong is still likely to increase in value again," said Mr. Khoa. The basis for this assessment is two reasons.

Firstly, the USD is forecast to weaken again in the international market in the last months of the year as the Fed has reached the end of its monetary tightening cycle. Secondly, Vietnam's internal factors still show positive signs.

Despite being affected by a decline in orders, the trade balance of goods in the first 7 months of the year still had a trade surplus of 15.23 billion USD (in the same period last year, the trade surplus was 1.34 billion USD). Foreign direct investment increased steadily, with realized capital in the first 7 months estimated at 11.58 billion USD, up 0.8% over the same period last year.

Meanwhile, the government ’s efforts to support economic recovery through broad-based monetary and fiscal policies could also help rebuild investor confidence in other sectors, as well as produce positive results. “These are the grounds for confidence that the exchange rate will stabilize again in the near future,” Mr. Khoa said.

With these analyses, HSBC maintains its forecast of an average exchange rate of VND23,450 at the end of the third quarter and VND23,350 at the end of this year.

Di Tung

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