Vietnam's local currency the dong is likely to devalue 1.5% against the U.S. dollar this year to VND24,600 as upward pressures persist, KB Securities Vietnam (KBSV) said in a report.
The significant interest rate gap between USD-denominated and VND-denominated loans and the upward trend of the U.S. Dollar Index (DXY) together with high geopolitical tensions pose the two largest risks to the USD/VND exchange rate in the time ahead, KBSV analysts said.
On the external front, the cooling of U.S. inflation is slowing down, with the latest Consumer Price Index (CPI) and Producer Price Index (PPI) coming in higher than market expectations.
This data have prompted the DXY and 10-year bond yield to bounce back while just four interest rate cuts are expected this year, compared to the six initially forecast.
On the domestic front, the USD/VND rate will be supported by ample forex supplies such as foreign direct investment (FDI) and inbound remittances.
In addition, the State Bank of Vietnam is expected to keep an accommodative monetary policy and allow a moderate devaluation of the dong. It will likely intervene only when there are abnormal fluctuations as the local economy needs more monetary assistance to recover, according to KBSV analysts.
They noted that the USD/VND rate on the interbank market has remained high in the range of VND24,200-24,600 since January due to the strength of the greenback and a large gap between USD- and VND-denominated interest rates, prompting carry trade to increase.
Several securities companies in Vietnam have predicted the VND to weaken by 1-3% against the USD this year. VNDIRECT Securities expects the dong to devalue 1-2% while Vietcombank Securities anticipates a 3% depreciation.
In a January note, Shinhan Bank said the rate could reach a yearly average of VND24,050. The exchange rate may remain high in the first half of the year due to negative external conditions, and ease in the latter half as major central banks are likely to end their tightening policies.
On Monday morning, the State Bank of Vietnam raised the mid-point USD/VND rate by VND8 to VND24,004. Since the start of this year, the rate has increased VND44.
USD prices at commercial banks rose VND10-30, with Eximbank raising its quote by VND10-20 to VND24,440-24,830 for bids and asks and Vietcombank by VND30 to VND24,450-24,820.
The free-market price of the greenback is fixed at VND25,220-25,290, up VND70 from last weekend for both buying and selling.