State Bank withdraws net 230,000 billion VND, USD/VND exchange rate still under pressure to increase

The exchange rate continues to face upward pressure.

In recent trading sessions, the USD/VND exchange rate has remained under upward pressure, although volatility has decreased.

After reaching a historical peak of 24,110 VND/USD on October 20th, the central exchange rate was adjusted down to 24,087 VND/USD by the State Bank of Vietnam (SBV) in the trading session on October 25th. With the +/- 5% margin currently applied, the ceiling exchange rate that banks are allowed to trade at is 25,291 VND/USD.

Most banks are currently quoting the selling price of USD at 24,730-24,760 VND/USD, lower than the ceiling and lower than the historical peak of 24,888 VND/USD recorded on October 25, 2022. Nevertheless, this is still the highest level since the beginning of the year. The VND remains under downward pressure due to the strong USD in the international market amidst global instability.

On October 25th, Vietcombank listed the exchange rate at 24,300 - 24,730 VND/USD (buy - sell). Over the past week, the USD price at the bank increased by 85 VND in both the buying and selling rates.

Compared to the end of September, the USD/VND exchange rate at Vietcombank has increased by 1.1%, thereby putting pressure on monetary policy as well as the State Bank of Vietnam's efforts to combat inflation and the Government's solutions to stimulate rapid economic growth.

*The large interest rate differential led to a sharp increase in the USD.*

The USD/VND exchange rate continues to rise despite the fact that over the past month, the State Bank of Vietnam has intervened in the liquidity of the interbank market through the issuance of 28-day treasury bills.

In total, from September 21st to October 24th, the State Bank of Vietnam (SBV) withdrew over 263,000 billion VND, while nearly 30,000 billion VND worth of treasury bills matured. The total net withdrawal amounted to 233,000 billion VND.

Although the USD/VND exchange rate in the banking system continues to trend upwards, pressure on the VND has eased. Interest rates in the interbank market have risen again, from a record low of 0.35%/year on October 13th to 1.47%/year on October 20th.

The 3-month interest rate also rose to 3.5%/year, gradually approaching the market rate for deposits in the primary market. As a result, the interest rate spread between VND and USD deposits narrowed significantly.

According to ACB Securities, the recent increase in the USD exchange rate is mainly due to the prolonged interest rate differential between USD and VND since May 2023 and the appreciation of the DXY index - which measures the fluctuation of the USD against a basket of 6 major world currencies.

Amidst slow credit growth and abundant liquidity in the interbank market, interest rates for VND deposits in this market have reached record lows. The interest rate differential between USD and VND deposits in the interbank market has remained at 3.0-3.5% for an extended period, favoring the USD. Consequently, the entire banking system has been motivated to maintain a net buying position in USD, contributing to the rise in the USD/VND exchange rate.

Meanwhile, the DXY index has also risen sharply, from 99 points in mid-July to its current level of 106.35 points.

The yield on 10-year US Treasury bonds surged, reaching a 16-year high on October 23rd, exceeding 5% per annum. This development reflects market expectations that the Federal Reserve will maintain high interest rates and that the government will continue selling bonds to address the growing deficit.

*Fluctuations in overnight interest rates in the interbank market. (Chart: M. Ha)*

Establish a new equilibrium point.

As can be seen, following the State Bank of Vietnam's proactive move to withdraw money from circulation, the foreign exchange market has relatively stabilized. Although the USD/VND exchange rate continues to inch up, the pressure on the domestic currency is no longer significant.

After more than a month of issuing 28-day treasury bills to absorb excess VND liquidity in the interbank market, VND interest rates have begun to approach 1-3 month deposit interest rates in the primary market.

However, if this interest rate increases further and remains at that level for some time, it could encourage banks to raise deposit interest rates again, thereby creating a domino effect on the system. Meanwhile, the exchange rate has risen sharply recently (+1.12%) and is not far from its 2022 peak of 24,888.

According to ACB Securities (ACBS), any upward fluctuation in interest rates or exchange rates in the coming days could lead to the State Bank of Vietnam implementing additional policies to achieve stability and balance.

Nevertheless, this securities firm believes that the State Bank of Vietnam still has sufficient tools to maintain the stability of the exchange rate and interest rates. These include a relatively abundant supply of foreign currency from import and export activities, foreign direct investment (FDI), foreign indirect investment (FII), and remittances. Meanwhile, the pressure to repay foreign debt has not increased dramatically.

Specifically, according to the General Statistics Office's report, in the first nine months of 2023, import and export activities showed a surplus of $21.6 billion; services showed a deficit of $6.7 billion; disbursed FDI capital was $15.9 billion; and remittances amounted to $9-10 billion.

According to ACBS, the market is at a new equilibrium point, although it remains quite fragile.

*Over the past month, the State Bank of Vietnam has been aggressively withdrawing money from circulation through treasury bills. (Chart: M. Ha)*

Agriseco Securities believes that the exchange rate will face upward pressure in the coming period as the Fed forecasts an interest rate hike in November while Vietnam maintains low interest rates.

VCBS Securities forecasts that the strength of the US dollar will remain high at least until November, and pressure on the exchange rate will continue.

According to Agriseco, the State Bank of Vietnam may have to use additional measures to regulate the exchange rate.

In the short term, ACBS believes the State Bank of Vietnam (SBV) may implement two solutions. These are allowing treasury bills to mature and funds to flow back into the interbank market, thereby cooling down liquidity and interest rates. However, the ultimate goal is to keep interbank interest rates high, close to the deposit rates in the primary market for 1-3 month maturities, and to avoid creating a race to increase interest rates in the primary market.

In the event that liquidity management tools through treasury bills prove ineffective, the exchange rate continues to rise sharply, and interest rates remain high, the State Bank of Vietnam may consider using the option of selling USD forward contracts with maturities of 3-6 months and allowing banks to cancel them at will.

The above solutions can be flexibly combined and will depend heavily on the credit growth rate of the system as well as the supply and demand of USD in this fourth quarter. In the event that credit growth can surge in the last quarter of the year, ACBS believes that the State Bank of Vietnam may even consider supplementing liquidity through the open market channel.

Deputy Governor: 'Accepting fluctuating exchange rates is necessary; if they remain rigid, it's not a market economy.' Deputy Governor Dao Minh Tu stated that while some have commented on the volatile exchange rate, the market must accept these fluctuations; if it remains rigid, it would no longer be a market economy.

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