Vietnam central bank may step up forex purchase as USD/VND rate cools: broker

The Vietnamese central bank is expected to purchase more foreign currency to enrich its forex arsenal given ample supplies and a much weaker greenback, Hanoi-based Vietcombank Securities says.

After the U.S. Federal Reserve (Fed) cut its benchmark interest rates by 50 basis points last month, the U.S. dollar has weakened, resulting in a lower USD/VND exchange rate.

Vietcombank, the largest forex trader in Vietnam, was offering the dollar at VND24,735-25,125 for bids and asks on Tuesday afternoon.

The Vietnamese dong (VND) has depreciated 1.3% against the U.S. dollar since the end of last year, markedly lower than almost 5% in the year to May, Vietcombank Securities (VCBS), a unit of state-controlled Vietcombank, said in its latest macro report.

Recent U.S. inflation and labor market data may slow down the Fed’s easing cycle, but the interest rate reduction trend will persist in the coming time and keep the dollar relatively weak, giving more room for the forex market in Vietnam, it added.

Meanwhile, there is abundant USD supply in Vietnam thanks to a positive trade balance, rising foreign direct investment (FDI) disbursement, and robust inbound remittances.

“With the Fed expected to continue cutting rates, the USD remaining weak, and ample forex supplies at home, the USD/VND rate will likely remain relatively stable in the coming time. Pressures on the forex rate, if any, will be insignificant and short-lived,” the report said.

The State Bank of Vietnam (SBV) has not officially released an accurate figure for its forex reserves this year. At a government press meeting in March, SBV Deputy Governor Dao Minh Tu put the figure at $100 billion as of end-2023.

According to the latest Vietnam report in September, the International Monetary Fund (IMF) projected Vietnam’s gross international reverses at $84 billion this year and $97.9 billion in 2025, compared to $92.3 billion in 2023.

According to the VCBS report, VND liquidity in the local banking system is set to increase in comparison to the last few months.

After hitting all-time lows in April, VND-denominated deposit interest rates have inched up by 40-50 basis points across the board since to keep the VND attractive. However, upward pressures on the interest rates have eased as the dong has strengthened against the U.S. dollar and inflation has remained under control.

As such, VND interest rates are likely to move sideways in the coming months or even decrease slightly with an aim to support economic growth amidst severe damage caused by natural disasters.

Typhoon Yagi, which devastated Vietnam’s northern region last month, has left negative consequences on agriculture, fisheries, and infrastructure, causing economic activity disruptions. However, these adverse effects will be compensated by a stronger than expected recovery of the manufacturing and service sectors, the report said.

In addition, the government is accelerating disbursement of public investment funds, stimulating consumption, and launching aid packages for businesses.

Therefore, the broker has maintained its GDP growth forecast for Vietnam at 6.7-6.9% this year.

The broker’s projection is line with HSBC’s latest upward revision to 7% and higher than forecasts by UOB, the World Bank, think tank AMRO, the IMF and market intelligence firm S&P Global.