Forex Investment and Currency Trading

Following last week’s move of SBV to widen the dong trading band  to +/-1% but prohibiting banks from using third party currency, the onshore interbank FX Market was temporarily frozen.

However, over the last week : 1) SBV re-peged the official rate 0.4% weaker and combined with the widening of the band, the official ceiling USDVND is now 1.4% weaker at 16,848; and, 2) market thinks  SBV did provide USD to banks, though not yet enough to restore the FX market in equilibrium.  Nonetheless with the combination of these two measures, market thinks the USDVND ceiling rate is now only about 1% away from clearing on bid-offer side.

Moreover, some liquidity in the FX interbank market appear to be slowly returning from their earlier paralyzed state, with market now actively quoting EURVND, though daily trading volumes in the interbank market are still significantly below normal levels of about US$300m prior to the new regulations.

Thus, the earlier fears that the measures announced last week could result in an extended freeze  on the  FX market and potentially  disrupt economic activitiy and capital flows, tantamount to some form of capital controls, if SBV does not provide  sufficient USD is gradually being addressed. 

IN the process, however, SBV is estimated to have sold at least about $500m-$600m to the banks since Friday, resulting in further erosion of SBV’s FX reserve position from the $20.7bn figure quoted a few weeks ago.  Market expects more pressures will persist, especially as the official ceiling is still overvalued vis-a-vis the market-clearing rate.  

Implications:   If SBV takes continued steps to restore some market equilbrium in the FX market, this should help restore investor confidence.  However, the need to maintain this equilibrium will require SBV should be willing to let the official rate adjust more in line with the market, otherwise, they will end up having to deploy more FX reserves.  The key longer term issue for Vietnam’s credit profile is its ability to address overheating concerns, external imbalances and bank sector vulnerabilities, which will ulitmately determine the fundamental underpinnings for how the currency will behave.   While some tentative signs of improvement are seen, it is still too early to decisively conclude Vietnam has succeeded in engineering a soft-landing for the economy.