Explaining the State Bank’s move to sharply lower the buying price of USD

3 min read

On June 8, the State Bank of Vietnam (SBV) reduced the bid price of USD for 6-month term by 150 dong to 22,975 dong. In addition, commercial banks are not allowed to cancel as before. After the decision of the State Bank of Vietnam, the USD/VND exchange rate dropped to VND 22,955 on June 8, 2021 (down 0.6% compared to the end of 2020).

According to KB Securities Vietnam Company (KBSV), this move shows that the need to buy foreign currency of the State Bank to supplement foreign exchange reserves has decreased.

“The performance price for the 6-month term contract is about 30 VND lower than the interbank rate on June 7 and the maturity period falls around the end of the year, the demand for foreign currency from customers is large, so there is a high chance that the number of contracts performed will be low. Foreign exchange reserves are now higher than the standard level, according to the IMF scale, liquidity in the market remains abundant, while inflationary pressures remain, so the SBV will be more cautious in using foreign exchange channels to provide liquidity to the market” explained KBSV’s expert.

In addition, Vietnam is still on the watch list for “currency manipulation” from the US, so the SBV’s action can both help relieve pressure on VND (in the context of the dollar’s depreciation), while avoiding violations. violates criterion 3 (intervention in foreign exchange for at least 6 months).

Besides, according to KBSV, the SBV’s action to reduce the purchase price of USD will partly relieve pressure from the import inflation aspect.

“This move comes against the backdrop of the DXY (USD strength measurement) index maintaining a low of 89-90 points (the USD falls) while CNY has increased sharply since the end of 2020 (up 2% compared to the beginning of the year). NEER and REER roads have fallen sharply since their peaks in March 2020, showing that VND has fallen relatively against a basket of currencies. This has put pressure on imports (increasing inflation imports)”, the expert noted.

According to the latest data from the General Department of Customs, in May, Vietnam had a trade deficit of more than 2 billion USD, causing the accumulated trade balance in the first 5 months of the year to reverse with a deficit of nearly 500 million USD. Imports increased partly because the prices of many imported goods and raw materials increased sharply.

In addition, not allowing commercial banks to cancel the forward contract will help the State Bank to better keep abreast of the actual foreign currency supply of commercial banks, but limit the flexibility in cash flow of commercial banks.

“The non-cancellation will require credit institutions to hold foreign currencies for longer and limit “trading”, and sbv must balance long-term copper liquidity and accurately forecast customer needs to be able to adequately meet the supply of foreign currencies and currencies”, KBSV’s side makes a point.

KBSV emphasized that the biggest risk to the foreign exchange rate today is the move of the US Federal Reserve (FED). Inflation and employment data in the US will need to be closely watched to be able to draw conclusions whether inflation in the US is already worrying or not. The upcoming Fed meetings, especially September, will be the focus of attention. In the worst case scenario, when the Fed starts to signal a decrease in the speed of asset purchases, the USD will increase rapidly and put pressure on emerging currencies, including VND.

Source: vietnamfinance.vn – Translated by fintel.vn