Vietnam central bank ups dollar sales to salvage local currency: broker

Vietnam’s central bank has sold an estimated $6.4 billion worth of foreign currency since April to prevent the Vietnamese dong from sliding further against the greenback, according to a brokerage house.

The amount includes $1.9 billion in June, lower than the volume of forex sold in May, said analysts with Ho Chi Minh City-based Viet Dragon Securities (VDSC).

The State Bank of Vietnam (SBV) started to sell hard currency on April 19 when the dong had already depreciated circa 5% against the U.S. dollar.

The Investor reported on June 27 that the SBV, the country’s banking regulator, had sold $5.5 billion worth of foreign currency since late April to intervene in the forex market, including $2.4 billion in May.

The VDSC report also said that the SBV net withdrew VND99.5 trillion ($3.91 billion) from open market operations (OMO) in June, up 62% against May, marking the second straight month of net withdrawals.

As of July 4, there were VND34.5 trillion ($1.36 billion) and VND147.8 trillion worth of repos and Treasury bills outstanding on the OMO market.

Interest rates on overnight borrowings, which account for 80-90% of transactions on the interbank market, bounced back to the 4.5% per annum territory in the first days of July after dropping slightly in late June.

On one hand, withdrawing cash from the OMO market and selling forex has helped buoy interbank interest rates at high levels. On the other hand, the moves have also caused VND liquidity distress, said the analysts.

“This will lead to liquidity risks in the banking system in the time ahead when money supply, M2, and deposits rise slowly while credit growth has accelerated,” the commented.

Reckoning the SBV’s monetary policy in the second half of this year, VDSC analysts expected the SBV to continue facing USD/VND rate pressures as the U.S. dollar will likely stay strong.

They attributed the USD strength to the Fed’s slower interest rate cuts than other central banks, leading to a large interest rate gap between the U.S. and other economies; a possible win for Donald Trump in the November election that may trigger a return of inflation; and prolonged geopolitical risks, helping the USD retain its favored safe asset haven status.

Based on the projections, the analysts predicted the SBV would continue selling forex to protect the VND. However, due to the bank’s limited forex arsenal and seasonally high demand for USD at the year-end, the SBV may risk spending its forex reserves without succeeding in reigning in the dong depreciation.

Therefore, the SBV may be forced to continue raising OMO interest rates to narrow the USD-VND rate gap on the interbank market. If the SBV fails to keep the USD/VND exchange rate steady by tapping forex reserves, it may lift its policy rates by 25-50 basis points, said the VDSC analysts.

Analysts with leading Singaporean bank UOB earlier this month expected the SBV to keep its key policy rates unchanged for the rest of 2024, driven by steady macroeconomic conditions.

The analysts reiterated that the VND may recover in the second half this year as external pressures from the USD ebb ahead of an expected Fed rate cut in September.

In addition, the VND is likely to benefit from a subsequent recovery in the CNY in H2/2024 as China’s economy shows clearer signs of stabilization.

They updated USD/VND forecasts at 25,200 in Q3/2024, 25,000 in Q4/2024, 24,800 in Q1/2025 and 24,600 in Q2/2025.