Given the recent adjustment of the exchange rate, the State Bank of Vietnam (SBV) will inject U.S. dollars into the economy when needed, said SBV Deputy Governor Le Minh Hung.
Banks have strengthened their dollar holdings as the dong interest rate has been further revised down as credit growth has remained low, he explained.
When the exchange rate was poised to rise, exporters sought to sell the greenback to banks. Although the volume was not hefty, it has led to a sense of scarcity on the foreign exchange market, a source told the Daily.
The central bank is monitoring the demand so as to intervene in a timely manner. In fact, there has been no increase in activity in the market.
Incoming remittances fell in the early months, but not significantly, and moreover, the central bank has bought about US$5 billion, thus improving dollar supply.
Still, Hung said he expected banks would reduce dollar holdings as local currency credit has started flowing into the economy again.
In the year to date, the U.S. dollar price quoted by Vietcombank has risen 1.87% over late 2012. The same has been reported at most other banks.
However, the average inter-bank exchange rate has picked up only 1% since the SBV slightly depreciated the dong on June 28. In a statement released early this year, SBV Governor Nguyen Van Binh said the dong fall against the dollar would not exceed 2% this year.
MayBank-Kim Eng: No big exchange rate adjustment in H2
The exchange rate between the Vietnamese dong and the U.S. dollar will be affected by several factors in the second half of the year, but it will not move much, says a report issued last Thursday by MayBank-Kim Eng Securities Company.
The gold market volatility is said to be the major factor for the weakening of the Vietnamese dong. The wide gap between local and global gold prices has piled pressure on the dong both ways: giving rise to gold smuggling and forcing the central bank to use some US$1 billion from the foreign reserves to import gold for domestic sale, especially to banks.
Due to the increased gold import, the dong has been weakening although the foreign reserves remain sound, equivalent to three months of import cover, says the report.
The fact that foreign investors lock in profits in the government bond market has left some impact on the exchange rate.
Foreign investors hold some 10% of government bonds. They are enjoying higher yields because inflation in Vietnam has been falling since 2011 and banks have been boosting purchases of government bonds due to low credit growth.
In the first five months, bank deposits increased 7%, while credit growth was only 3%. As of end-June, the State Treasury had raised a total of over VND124.3 trillion from government bond sales, meeting 73.1% of the year’s plan.
MayBank-Kim Eng has warned that the exchange rate would be placed under pressure when foreign investors lock in bond profits in the bond market to buy foreign currency for repatriation to their home countries.
Aware of this demand, banks have been actively purchasing foreign currency because they have abundant dong. Therefore, the central bank has warned banks against currency speculation.
However, MayBank-Kim Eng has predicted foreign investors will not strongly take profit. If they did so, bond yields would go down.
Meanwhile, trade deficit may not affect the exchange rate this year. The deficit is being financed by foreign capital inflows, especially FDI, and in recent years, there has been a balance between capital inflows and outflows.
Usually, inflation impacts on the exchange rate, but Vietnam’s inflation forecast at 6-7% this year may not be a major cause of exchange rate volatility.
With robust foreign exchange reserves, low inflation, and mild trade deficit, MayBank-Kim Eng believes there could hardly be any pressure on the exchange rate towards the year’s end. However, the company forecasts there may be a further devaluation, but not considerably, under the pressure of foreign investors’ profit taking on the bond market.
The greenback in the informal market last Friday inched up to VND21,620 for selling and VND21,580 for buying. Meanwhile, banks quoted the U.S. dollar selling price at VND21,246, and raised the buying price to VND21,240, versus VND21,220 on the previous day.