USD/VND exchange rate breaks through the barrier again, interest rates drop sharply

Normally, in the last months of the year, the market often witnesses strong conversion activities from VND to foreign currencies as foreign financial institutions and foreign investors tend to buy foreign currencies to transfer profits back to their home countries. The USD/VND exchange rate accordingly increases in the short term.

However, this seasonality seems to have disappeared since last year. Because the abundant foreign currency source has caused the USD/VND exchange rate to frequently break through the immediate buying limit of the State Bank of Vietnam.

Specifically, around the end of November 2019, although the State Bank immediately lowered the USD buying price to create a new threshold, the USD trading price on the interbank market still firmly broke through, even falling quite deeply. System liquidity pressure was reduced thanks to the counterpart funds when the State Bank bought foreign currency, and interbank interest rates decreased in many sessions.

Bank interest rates continue to fall sharply.

By this year, not only is foreign currency abundant, but VND is also in surplus due tocredit growthslow. Last week, the interbank USD/VND exchange rate broke through the 23,175 VND/USD barrier. And in the trading session on November 17, this development was repeated, the USD/VND exchange rate closed at 23,173 VND/USD.

Since the Covid-19 pandemic broke out in late January 2020, the US Federal Reserve (FED) has lowered its operating interest rate to 0-0.25% (lower - upper limit) and restarted its bond-buying program (also known as quantitative easing “QE”), in an effort to rescue the US economy from the recession caused by the pandemic.

Unprecedented loose monetary policy coupled with negative economic growth in the US in 2020 has caused the USD to decline. As of November 2, the USD strength index has decreased by 2.4%.

“On the contrary, large trade surpluses andforeign exchange reservesThe continuous increase will help the USD/VND exchange rate maintain a stable trend from now until the end of the year," the research team at VNDIRECT commented.

Currently, the average interbank VND interest rate has decreased in all terms compared to the previous session. Specifically, overnight 0.14%; 1 week 0.19%; 2 weeks 0.22% and 1 month 0.36%.

Similarly, the average interbank USD interest rate decreased by 0.01 - 0.03 percentage points in most terms except for the 1-month term. Overnight trading was 0.13%; 1 week 0.18%; 2 months 0.23%, 1 month 0.33%.