Saturday, January 10, 2009

FX rate in Vietnam

If you have been following the Vietnamese market recently, you will see that the State Bank has raised interbank USD/VND rate (official midpoint ) dramatically to 3% but still keep the band of 3%. Typically, banks and financial institutions operating in Vietnam have to follow state bank’s regulation on FX. Accordingly, they must transact FX deals within the variance band of interbank rate that SBC announces daily.

Earlier in November, there were a number of rumors on the issue that State Bank would lift USD/VND variance band to 5% from 3%, which is due to the heating foreign exchange free market. The USD/VND rate transacted in the black market was higher at 5% than the interbank rate. Rumors of such change in the foreign exchange band is driving the market.

Basically, a flexible foreign exchange rate is necessary for the economy amid recent economic turmoil. However, the change in this time becomes sensitive. Perhaps, the Vietnamese Dong devaluation is based on inherent attributes of the economy such as weaker export industry, or economic stimulation from huge money amounts injected into the economy. However, a key factor led to this situation is rumors and speculation.

The State bank's expectation of better liquidity foreign exchange rate could be not realized by the adjustment in the USD/VND interbank rate. But, speculators think that this action from State Bank shows a sign that Vietnam Dong could be continued to devalue in the short time. So, speculators don't want to sell USD out in the short term. Again, this leads to the shortage of USD in the market. In return, foreign exchange rate could be higher. Therefore, I raise a call that there would be another devaluation of Dong in the next time.

*edited by Alexander Lê

1 comment:

  1. Hello Son,

    I just edited some stuff on your entry, just make sure the meaning is still the same. I just have a few questions I was not sure about in your entry.

    The state bank raised the USD/VND rate to 3% while maintaining 3% band. I'm sure I follow what rate that is?

    Also I think that you are telling me currently the Dong is depreciating? Could you possibly tell me what you think the state bank will do in term so monetary policy and its possible affects on the current businesses or commercial banks in Vietnam. I'm sure lot of people investing in Vietnam or looking to learn about Vietnam would be interested to see how the currency fluctuations are affecting the business/investing environment.

    Also, you say that rumors that the state bank will increase the FX band to 5% is leading the depreciation of the Dong... which in turn will affect the market, which market will be affected by this depreciation?

    You also mention the economic turmoil going on in Vietnam, how is this related to the FX rates. Perhaps in another blog you could discuss the general macro environment in Vietnam. I would love to hear some updates since I haven't been able to follow the Vn markets to closely from the UK.

    Also you mention "the change in this time becomes sensitive," I'm not sure what this means.

    Lastly you say you call the Dong will be devalued in the "next time" could you give me a more clear time frame of when "next time" is?

    Overall, it was good to hear news about Vietnam since it has been awhile. It seems that from the beginning of Summer 2008, FX markets are still volatile as ever.

    Nice post and hope to hear more about Vn,



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