Vietnam Adds to Dong Intervention With Plan to Cut Dollar
Comment of the Day

June 18 2013

Commentary by Eoin Treacy

Vietnam Adds to Dong Intervention With Plan to Cut Dollar

This article from Bloomberg News may be of interest to subscribers. Here is a section
Vietnam looks set to ratchet up intervention in the foreign-exchange market to stem losses in the dong and promote greater use of the currency. The State Bank of Vietnam is considering lowering the maximum interest rate that lenders can offer on dollar deposits to curb demand for the U.S. currency, Nguyen Thu Ha, deputy head of monetary policy at the central bank, said in a telephone interview in Hanoi today. She said no timeframe has been set.

The cap will be cut “sharply,” news website VnExpress reported yesterday, citing central bank Governor Nguyen Van Binh. The move comes as Asian policy makers seek to temper declines in their currencies amid concern a reduction in U.S. monetary easing will spur capital outflows, putting pressure on inflation as exchange rates weaken. The State Bank intervened “with reasonable volume” to slow a slide in the dong fueled by increasing dollar demand from importers, according to a statement on its website yesterday. The local currency tested the upper limit in which it's allowed to trade for a second day.

Eoin Treacy's view The last decade has been characterised by concerted strength in Asian currencies against the US Dollar in particular. However, with the potential for the US to begin tapering its extraordinary monetary policy and Japan adopting an aggressive easing policy, the potential for other Asian countries to court weaker currencies has increased.

The Asian Dollar Index remains in a corrective phase as it continues to extend its pullback from the upper side of the 22-month range. While oversold in the short-term, a sustained move above 117 will be required to break the progression of lower rally highs and indicate a return of demand at the lower side of the range.

Against this background and following its devaluation the comparative strength of the Dong is noteworthy. Steps are underway in the Vietnamese administration to bolster the currency, combat inflation and to get the country's economic development back on track. Provided they can maintain the peg, which has been in evidence since February 2011, the Dong is unlikely to represent a headwind to foreign investment.

The stock market is currently in a process of mean reversion but a sustained move below the 200-day MA, currently near 465, would be required to question medium-term recovery potential.

Back to top