Maritimebank research shows that the VND will experience a certain level of impact from any decision the US Fed makes regarding interest rates.
Vietnam’s foreign currency market will experience some degree of impact regardless of whether the US Federal Reserve decides to increase interest rates or postpone it to a later date.
A report from Maritimebank’s research center stated: “Based on the exchange rate fluctuation we believe that Vietnam’s foreign currency market will be less affected by the Fed decision than by the devaluation of the Chinese Yuan.” It added that the actions of banks to hold more foreign currency before the Fed makes a decision is a normal step in preventing risk from major fluctuations.
Since the start of the week beginning September 14 the USD/VND exchange rate has headed upwards, with USD sold to some commercial banks reaching VND22,540 per USD late on September 15, or an increase of VND30, which is VND7 lower than the ceiling.
It may be too early to say that this is the start of any period of unstable fluctuations because of concerns over what might happen to the exchange rate after the Fed meeting, but the psychology of expectation is an issue that must be taken into account.
In explaining its devaluation of the VND on August 19, the State Bank of Vietnam (SBV) said it was to prevent any negative influence from the FED increasing interest rates. Then, on August 25, at a meeting of the government, SBV Governor Nguyen Van Binh spoke of the importance of keeping the exchange rate stable, even by selling foreign currency.
The Fed decision will result in two scenarios.
If it increases interest rates, Vietnam will be affected directly by the devaluation of the VND and indirectly by the effect on the Yuan, which in turn would affect the VND.
In this case, the SBV will have to make greater efforts and use every technique at its disposal to stabilize the market, which would include selling more foreign currency, as the central bank committed it would not devalue the VND any further on August 25.
If the Fed was to postpone a decision on increasing interest rates, pressure to do so would not be higher but the market would anticipate a move at its next meeting.
Maritimebank therefore said that the SBV should consider a more flexible exchange rate regime to adapt to market movements and, in particular, deal with any external shocks.