USD/VND exchange rate volatility of more over 3% is acceptable

Fed's dovish statements

At its most recent meeting, the Fed announced its tenth consecutive interest rate rise, boosting the benchmark rate by 0.25 percentage points to a target range of 5-5.25%.

Furthermore, the FOMC's March minutes contained the following sentence: "The Committee anticipates that some additional policy firming may be appropriate in order to achieve a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time." Instead, in the most recent minutes, the phrase "in determining the extent to which additional policy firming may be appropriate" was inserted.

The said shift is significant since the Fed no longer anticipates more rate hikes. The next interest rate path, on the other hand, is unclear and greatly contingent on forthcoming macroeconomic data. It suggests that the Fed's rate hiking cycle is coming to an end.

FED Chairman Jerome Powell stated at the Thomas Laubach Research Conference that rates may not have to climb as much due to tighter lending conditions following the banking sector turbulence. "The aftereffects of the banking sector's problems relieved some pressure on the Fed to keep hiking rates," Powell said.

"The financial stability tools aided in calming the banking sector." However, developments there are leading to tighter lending conditions, which are projected to impact on economic growth, hiring, and inflation. As a result, our policy rate may not need to climb as much as it would normally in order to reach our objectives. Of course, the magnitude of it is extremely unclear," Powell noted.

The market now expects the Fed to stop rate rises at its June meeting and lower rates as early as 2H23 due to the potential of a recession, after the Fed's rather dovish pronouncements on incoming policy.

VND risks on the upside 

DXY had dropped to 103 points as on May 19, 2023. Because of the weaker DXY, the USD/VND has down 0.8% year to date to 23,449. Among regional currencies, the US dollar fell against the Philippine peso (-0.8% ytd), Thai baht (-2.2% ytd), and Indonesian rupiah (-5.5% ytd), but rose against the Malaysian ringgit (0.7% ytd).

Because of decreasing exchange rate pressure, the State Bank of Vietnam contributed around USD6 billion in 4M23, bringing total foreign exchange reserves to approximately USD93 billion. As a consequence, the SBV has pushed around VND140,000 billion into the economy in order to purchase USD, therefore strengthening the liquidity of the Vietnamese banking system and decreasing domestic interest rates.  

Mr. Dinh Quang Hinh, analyst at VNDirect, sees negative pressure on the USD/VND exchange rate in 2Q23 as the FED may suspend its rate rise cycle as soon as its next meeting in June 2023, with the USD/VND exchange rate fluctuating between 23,400 and 23,700.

"Upside risks to the VND include (1) unexpectedly higher and longer-than-expected inflation pressure in the United States, and (2) a stronger-than-expected decline in remittances and FDI inflows amid global economic slowdown," Mr. Dinh Quang Hinh added.

Dr. Can Van Luc, BIDV's top economist, also stated that a USD/VND exchange rate volatility of more over 3% is acceptable. Due to the USD depreciation and the US economy's anticipated weaker growth in 2023, it is probable that the FED will not continue to raise interest rates from now until the end of the year, causing other currencies, particularly VND, to strengthen.