The USD/VND interbank exchange rate was volatile in the second quarter, consistently approaching and above the SBV's selling barrier of 25,450 (4.9% year to date). Although the SBV proactively raised the interbank interest rate to a relatively high level to limit  banks' carry trading, the exchange rate remained under persistent pressure, prompting the SBV to directly sell USD in substantial quantities (estimated at USD6 billion as of June 26). Accordingly, KBSV believes that the recent increase in the exchange rate is due to an imbalance between supply and demand for USD in the market, primarily due to (i) high demand for USD payment for imports and (ii) export and FDI enterprises keeping money abroad due to unattractive VND interest rates.

In 1H24, unofficial exchange rates continued to fall, reaching VND26,020/USD for selling on June 28 (5.05% YTD). The spike in unofficial rates was primarily caused by the surging global gold price, which created a significant disparity between local and world gold prices (at times surpassing VND20 million/tael), sparking demand for smuggled gold.

The domestic-international gold price disparity was reduced to VND8-9 million/tael after the SBV enabled SJC and four state-owned banks to buy and sell gold directly to customers. However, KBSV expects that this action will have a short-term impact on gold bars. Due to variations in global gold prices, gold rings were more expensive than SJC gold bars in early July.

During 1H24, the NEER and REER both traveled in the same direction. On June 26, 2024, NEER and REER had lost 0.5% and 0.1% of their year-to-date value, respectively. NEER fell mostly because VND declined against USD, EUR, and CNY while substantially appreciating against JPY, KRW, and THB, limit ing the loss in NEER. The lower increase in REER reflects Vietnam's CPI in 1H24 being higher than the average CPI of its key trade partners.

The early period of 2024 is still a difficult period for the SBV to manage exchange rates, especially when there are other existing pressures, such as the pressure from gold prices. However, the depreciation rate of VND is average compared to the currencies of other countries in the region and less than that of KRW, THB, and JPY.

The US jobless rate rose, but the CPI in June fell 0.1% month on month and 3% year on year, reaching three-year lows. This has heightened anticipation of a Fed rate cut. According to CME, the market expects the Fed to lower interest rates in September with a 95.3% likelihood, with three cuts planned this year. The Fed chairman's recent comments about not waiting for inflation to fall exactly to the 2% objective before cutting interest rates has strengthened this possibility.

With the new developments in the US economy as well as the sharp decline of DXY due to the expectation that the Fed will accelerate interest rate cuts, KBSV believes that the most intense period of the exchange rate has passed. Entering 3Q, the exchange rates may still have fluctuations due to the forecast of high import demand from businesses before cooling down in 4Q, thanks to the expectation that foreign currency sources will improve when exports are boosted, and remittances flow in parallel with FDI cash flow. Accordingly, KBSV forecasts that the exchange rate will stabilize again and the increase for the whole year will be at 3.5% YTD, equivalent to VND25,120/USD.

As the exchange rate has shown signs of stabilizing and falling below the SBV's selling threshold, KBSV believes that the SBV will continue to focus on regulating liquidity in the open market and keeping interest rates around 4-5% to limit   carry trade activities. Foreign currency sales may still be applied at times, but the volume of sales is expected to be relatively small. The increase in the policy rate, the OMO interest rate, or Treasury bills is not expected to happen.