VND holds steady after US rate rise

21.12.2017

Due to the State Bank of Vietnam’s anticipation of last week’s US rate hike, the VND stayed put last week, ahead of a probable devaluation of 1-2 per cent in 2018.

The US Federal Reserve (Fed) raised its interest rate by a quarter percentage point to the target range of 1.25-1.5 per cent, effective December 14, 2017. The Fed issued a statement saying that the labour market has continued to strengthen and that economic activity has been rising at a solid rate. To determine any future adjustments to the rate, the Fed said it will look at realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation.

As the US rate increase had been well-anticipated, the local FX market did not react negatively against the Fed’s rate announcement. The USD/VND rates were kept almost unchanged last Thursday, a day after the rate hike. Across commercial banks, the dollar was traded at around VND22,675 on the buy side and VND22,755 on the sell side. The central bank’s daily fixing, nevertheless, was adjusted down by VND7, from VND22,450 on December 13 to VND22,443 on the following day.

Kathy Lien, managing director of FX Strategy for New York-based BK Asset Management, wrote in her daily note to clients that, following the Fed interest rate hike of 25 basis points, instead of rising, the dollar sold off aggressively against all of the major currencies.

“Although Fed Fund futures did not change materially after the rate decision, the sharp sell-off in 10-year Treasury yields and corresponding dollar weakness tells us that investors were not impressed,” Lien noted. “The prevailing thought is that with no further action expected at the January meeting, the next time we’ll get fresh guidance could be as late as mid-March when Powell chairs his first monetary policy meeting.”

Prior to the Fed’s decision to swell its rate, Michael Kokalari, chief economist for VinaCapital – which has $1.8 billion in assets under management – said that the recent strength in the US economy seems to make it likely that “the Fed will raise interest rates three times next year, but part of the reason for the recent, rapid pace of US GDP growth is favourable comparisons between the US economy this year to the second and third quarters of 2016, when growth was slow”.

The dong value, according to Kokalari, has been rather steady this year, with the interbank FX rate appreciating by 0.2 per cent in the year-to-date, while the FX rate in the free market has been trading at some 1.5 per cent above the official value of the dong.

The solid FX rate also owes to the fact that the value of the greenback has been weak, with the Dollar Index Spot declining by as much as 10.6 per cent over the course of the year, he said.

“We expect the VND to depreciate by 1-2 per cent against the USD in 2018,” he told VIR.

He expects the State Bank of Vietnam to maintain its prudent macro-economic policies, and for Vietnam to run a 1-2 per cent/GDP trade surplus again next year (given a 12 per cent increase in foreign direct investment inflows – much of which is earmarked for the development of export-producing factories), but inflation pressures are building, and economic theory predicts that the value of the country’s currency tend to depreciate by an amount equal to their inflation differential – so if inflation is 4 per cent in Vietnam and 2 per cent in the US next year, then the VND should depreciate by about 2 per cent (in theory).

“Personally, I’ve been sceptical that the Trump administration would be able to pass meaningful tax reform – but the House and Senate both passed their own versions of the tax reform bill – which now must be reconciled, and must adhere to a rule that the tax cuts should not add more than $1.5 trillion to the US government’s debt over a 10-year horizon,” he said.

“If the Trump administration is able to pass meaningful tax reforms, it could strengthen the Fed resolve to raise rates next year – which would likely strengthen the value of the dollar.”

Source: Vietna.net

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