Nov 25th, 2016
Since the beginning of this month, the USD index has surged by nearly 4% to its highest level since 2003, around 101.7. This index, however, was up only 2% year to date. The rise in the USD has come just before a 25bps Fed tightening in December and a dovish attitude towards monetary policy of many key central banks around the world. According to the CME Group’s FedWatch tool, market expectations for a December rate increase were 93.5%. The stronger US dollar has put pressure on the yen and many other emerging market currencies. As a result, the yen has dropped sharply against the dollar with a depreciation of 8.2% in a month. China’s RMB has weakened to more than RMB6.9 per dollar, a 10% decline since the currency’s first devaluation in August last year. Furthermore, other ASEAN currencies also came under depreciation pressure as well.
The Vietnamese dong also moved significantly, but with less volatility. In November, the dong has fell ~2% to 22,756 per dollar, following the adjustments of the central exchange rate under the SBV’s guidance. This depreciation is in line with RongViet Research’s expectation and we think the SBV still has power to control the exchange rate at the moment thanks to high foreign exchange reserves. According to the SBV, the foreign exchange reserves were nearly $41 billion by the end of September, at an all-time high. Today, the SBV’s representative announced that policy makers will intervene in the market if necessary for a stable foreign exchange. The reason behind this statement is that the SBV has strong motives to let the dong depreciate modestly, in order to facilitate macroeconomic stability in terms of inflation and public debt. Accordingly, we believe the SBV will control the exchange rate below the level of 23,000 dong per dollar by the end of 2016.
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