HSBC: USD/VND exchange rate under pressure to increase in the first quarter

HSBC Vietnam experts predict that the exchange rate will be under increasing pressure in the first quarter but will improve in the second half of 2024.

Since the beginning of the month, the selling price of USD has increased from 130 to 170 VND at commercial banks. According to the General Statistics Office, the USD price index in January increased by 0.52% compared to December 2023 and increased by 3.69% compared to the same period last year.

In the free market, early last week (January 22), the USD price exceeded 25,000 VND for the first time since October 2022 2 and is still being sold above this threshold.

According to Mr. Ngo Dang Khoa, Director of Foreign Exchange, Capital Markets and Securities Services at HSBC Vietnam, there are two reasons why the greenback strengthened in January 2024.

First, recent positive signals from the US labor market and economy, along with statements from members of the US Federal Open Market Committee (FOMC) that they will continue to act based on actual data, have caused the market to gradually reduce expectations that the FOMC will soon lower the operating interest rate.

This development has caused US government bond yields to increase slightly, causing the USD to regain its strength in the international market. The Dollar Index (DXY) - measuring the strength of the USD against a basket of other currencies - is currently above 103. This is one of the fundamental reasons why local currencies in Asia, including Vietnam, have weakened against the USD.

Counting USD at a commercial bank on the morning of November 14, 2022. Photo: Thanh Tung — Counting USD at a commercial bank on the morning of November 14, 2022. Photo: *Thanh Tung*

In addition, the interest rate differential remains high in the context of relatively excess VND liquidity even in the period before Tet, which also caused the exchange rate to increase rapidly in the first weeks of 2024. Mr. Khoa forecasts that the USD/VND exchange rate will still be under increasing pressure this quarter for four reasons.

First, the monetary policy divergence between the Fed and the State Bank of Vietnam is likely to remain wide. Vietnam’s policy priorities are currently focused on supporting growth, in contrast to the US, where the Fed is likely to maintain monetary tightening as the economy grows faster than expected and core inflation cools slowly.

Second, VND liquidity in the interbank market will likely continue to remain at a good level due to the lack of significant changes in credit growth and public investment disbursement speed, at least in the first quarter.

Third, while Vietnam’s trade surplus and FDI may remain high, some global and regional geopolitical developments may have relatively negative impacts on the VND. And finally, the greenback is generally expected to maintain its strength in the first months of the year, while the yuan continues to weaken due to China’s slower-than-expected economic recovery.

Previously, in 2023, the State Bank had certain successes in managing the foreign exchange market when USD/VND maintained a depreciation rate of about 3.1% - calculated according to the selling exchange rate of commercial banks, although there were some periods when the exchange rate approached the 24,800 VND mark.

This year, HSBC forecasts the exchange rate will improve in the second half of 2024, especially when the USD peaks and the domestic economy and credit gradually recover. "We currently forecast the USD/VND exchange rate to end the year at 24,400," said Mr. Khoa.

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