Fluctuations on the currency field

The foreign exchange market was volatile in May. Source: SSI

Bank liquidity is less plentiful

May is the second consecutive month the State bank has had to pump money into the system. However, the net pumping volume decreased significantly from April's 58.6 trillion dong to 10.900 trillion dong, the volume of treasury bills in circulation decreased to 55.8 trillion dong. Issuance of treasury bills is the main tool used by the SBV to regulate liquidity in the past year in the context of good liquidity.

The interbank rates were more stable in early May but rebounded in the second half, especially for short terms. In particular, the overnight interest rate increased to 1.6% and is the highest interest rate recorded after Tet holiday.

Bank liquidity continued to affect the issuance of bonds by the State Treasury. The State Treasury has been forced to raise interest rates, especially for 10 and 15 year terms, with an increase of 16 basis points and 13 basis points, boosting secondary bond yields. The volume of bonds issued improved in May, however, after May, State Treasury has completed 29% of the year’s plan with the total value of VND 57,600 billion.

In general, SSI assessed that it is not worried about the liquidity of the banking system but it is necessary to monitor the new factors including trade deficit and withdrawal trend of foreign investors. According to the General Statistics Office, the trade deficit in May was estimated at 500 million USD, marking the return of trade deficit after several months of trade surplus. Foreign investors have been net sellers on the stock market, which may involve withdrawing capital from emerging markets as the Fed raised interest rates.

As the supply of foreign currencies decreased, the amount of VND injected to buy USD also decreased, affecting the supply of VND and banking liquidity. In addition, deposits of the State Treasury could not be held longer in the banking system. The bottlenecks in the mechanisms and procedures for disbursement of public investment will be dealt with for the development of the economy and society.

The pressure on the foreign exchange market

The pressures of exchange rate increased in late May leading to the strongest fluctuation since the beginning of the year. USD Index rose 7% from the bottom in 2018 to 94.8 points, pulling the USD / VND exchange rate from 22,800 VND to 22,880 VND, increasing 80 VND in just one week, 0.64% compared with the beginning of the year.

US inflation inched up to 2%, pulling US 10-year government bond yields up sharply to 3.11%, the highest level in nearly seven years. However, the meeting report of May suggested that the Fed could target inflation at around 2%, market sentiment is easing. The yield on the 10-year note fell below 3 percent, but the value of the dollar remained high.

Most of the major currencies depreciated against the US dollar, with the euro falling 6.7% from the peak in 2018, GBP fell 7.4%, JPY fell 3.4%. Emerging currencies were also affected hard by the risk of capital inflows to the United States, because of the Federal Reserve raising interest rates and rising global risks.

Brazil's BRL has plummeted and lost 11.2% since the beginning of the year, although this country regained positive growth after years of recession. Russian’s RUB and India’s INR also fell by 7.0% and 5.3%, respectively. In the BRIC group, only China maintained an increase of 1.99% against the dollar.

Other Asian currencies such as KRW (South Korea), IDR (Indonesia), PHP (Philippines) also fell. In that context, a slight depreciation of VND still helps Vietnam outperform other countries in the region.

According to SSI stock company, the domestic exchange rate is still supported by many factors. There is a record foreign exchange reserve of $ 64 billion, the SBV may be willing to intervene in market regulation when it is necessary. In fact, the SBV adjusted the central rate to VND 22,566 on June 1, which may be a clear signal for the market, and it had an immediate effect on the exchange rate, down by VND 40 to VND 22,840 .

However, according to Mr Nguyen Duc Hung Linh, director of investment analysis and consulting unit at SSI, just like banking liquidity, trade deficit and indirect capital flows are unknowns for the foreign exchange market. It should be monitored closely.