Interest rates and exchange rates simultaneously dropped shockingly.
In late November and early December, all markets focused their attention on gold as the precious metal continued to heat up and find its all-time high. Gold was supported by interest rates and exchange rates falling sharply.
First of all, from interest rates, most recently, the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) - the big brother of the banking industry has brought savings interest rates to a new "bottom" very low. Accordingly, the interest rate for 1-month term at Vietcombank is only 2.4%/year, for 6-month term is 2.7%/year. The highest rate is only 4.8%/year applied to terms of 12 months or more.
For a 12-month term, the lowest interest rate belongs to An Binh Commercial Joint Stock Bank (ABBank) at 4.2%/year. The remaining units are listed at common rates from 5.3%/year to 5.7%/year.
While the gold market is "feverish", both interest rates and exchange rates "hold hands" and decrease sharply. Illustrative photo
The sharp drop in interest rates has contributed to a more “calm” exchange rate. After a sharp increase at the beginning of the year, the USD/VND exchange rate has recently been “reversing gear”.
Closing this week, the USD/VND exchange rate at Vietcombank was listed at: 24,110 VND/USD - 24,450 VND/USD, down 280 VND/USD, equivalent to 1.13% compared to the last session of October.
Vietnam Joint Stock Commercial Bank for Investment and Development (BIDV) fixed the USD price this week at: 24,145 VND/USD - 24,445 VND/USD. Thus, after 1 month of trading, the exchange rate at BIDV has decreased by 270 VND/USD, equivalent to 1.1%.
At commercial banks, the greenback also had a similar downward trend. Vietnam Technological and Commercial Joint Stock Bank (Techcombank) adjusted the USD/VND exchange rate down by VND279/USD, equivalent to 1.13% to VND24,130/USD – VND24,450/USD.
It can be seen that, as the mobilization interest rate cools down, the USD/VND exchange rate also cools down. And vice versa, the exchange rate does not increase, which does not put pressure on the interest rate.
Will it continue to decline?
Vndirect Securities Company assessed that the pressure on the USD/VND exchange rate has cooled down as the US Federal Reserve (Fed) has a less hawkish view on monetary policy.
At the most recent Fed meeting in early November, the Fed kept its policy rate unchanged in the target range of 5.25-5.50%. This was the second consecutive meeting where the Fed kept its policy rate unchanged after a long period of increases. Following that, the US CPI for October as well as the newly released Producer Price Index (PPI) were both lower than market expectations.
“Therefore, the market is leaning towards the scenario that the Fed will pause interest rate hikes at the next meeting in December 2023 and cut interest rates as early as the second quarter of 2024,” Vndirect forecasts.
As of November 13, 2023, the US dollar index DXY has fallen to 105.6 points, down 1.2% from its recent peak just before the Fed's November meeting.
The weaker DXY has dragged the USD/VND exchange rate down to 24.383, down 0.9% from its recent peak on 26 October 2023 (still up 3.2% YTD). The USD has appreciated against most regional currencies since the start of the year, notably the Philippine Peso (up 0.6% YTD), the Thai Baht (up 3.9%), the Chinese Yuan (up 5.4%) and the Malaysian Ringgit (up 6.9%).
The USD/VND exchange rate is expected to continue to cool down in late 2023. Illustration photo
“We expect the USD/VND exchange rate to continue to cool down in late 2023 as the Fed may pause its rate hike cycle and expect the USD/VND exchange rate to fluctuate in the range of 24,300-24,400. We see a number of factors supporting the stability of the dong, including: a record high trade surplus, high current account surplus, and stable FDI and remittances,” Vndirect analyzed.
According to Vndirect, the reduced exchange rate pressure has created conditions for the State Bank to pump the previously net withdrawn amount of money into the market through the OMO channel. This move has temporarily dispelled market concerns that the State Bank will reverse its monetary easing policy due to exchange rate pressure.
Also according to Vndirect, deposit interest rates continue to decrease. Deposit interest rates have returned to low levels, as seen during the COVID-19 period (2021-6M22) due to excess system liquidity in the context of weak credit demand.
As of October 31, system-wide credit increased by only 7.39% compared to the beginning of the year, far from the target of 14% for the whole year of 2023. In addition, the Government also promoted public investment and fiscal expansion, thereby pumping more money into the economy.
“We expect the average 12-month deposit interest rate to be at 5.2% per year by the end of 2023. We also expect lending rates to continue to decline in the last months of this year thanks to the rapid decline in funding costs of commercial banks recently,” Vndirect expects interest rates to continue to decline.
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