Vietnam dong falls toward trading limit as importers buy dollars

Bloomberg

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A bank employee (R) counts Vietnamese dong banknotes at a bank in Vinh Yen city, Vietnam, August 19, 2015. REUTERS/Kham A bank employee (R) counts Vietnamese dong banknotes at a bank in Vinh Yen city, Vietnam, August 19, 2015. REUTERS/Kham

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Vietnam’s dong fell toward the weak end of its trading band as seasonal dollar purchases by importers to pay year-end bills coincide with rising global demand for the greenback.
The currency dropped as low as 22,515 a dollar, according to prices from local banks compiled by Bloomberg. That’s 2.8 percent weaker than the central bank’s fixing of 21,890. The dong can trade as much as 3 percent on either side of the official reference rate, which has been left unchanged since the third devaluation of this year on August 19.
The dollar has gained ground against all but two of 24 emerging-market currencies in the past month as expectations the Federal Reserve will raise interest rates in December bolsters demand for the U.S. currency. Fed futures contracts show there’s a 74 percent chance that borrowing costs will be raised this month in the world’s biggest economy.
“There is usual seasonal pressure on the dong at year-end, as we are moving to Tet so people will need the greenback to pay for import contracts,” Long Ngo, a Ho Chi Minh City-based research manager at Viet Capital Securities. “The Chinese economy is slowing down while commodities are trading at a record low, so some people start holding the greenback as a strong currency.”
The exchange rate for buying dollars at Vietnamese banks rose to about 22,540 dong on Monday, Tri Thuc Tre reported, citing quotes from lenders including Vietcombank, VietinBank, and Eximbank. The currency was little changed at 22,485 per dollar as of 3:14 p.m. in Hanoi.
Under pressure
The dong has been under pressure to drop but market participants won’t panic as the central bank will keep it stable through the end of the year, said Terence Mahony, the Ho Chi Minh City-based vice chairman of VinaCapital Group Ltd., the country’s largest fund manager.
"Next year it will be another story,” he said. “The central bank may weaken the dong in an incremental manner."
An Aug. 11 devaluation of China’s yuan prompted Vietnam’s central bank to double the dong’s trading band to 2 percent on August 12, and led to a further widening to 3 percent on August 19 that was coupled with a 1 percent weakening of the dong’s reference rate. The fixing was also cut by similar amounts in January and May.
“There will be no further dong devaluation from now until the end of the year unless China moves,” Long of Viet Capital said. “If China moves then Vietnam cannot stand still and will have to react. Otherwise, there is no risk of another dong devaluation this year as I don’t see any fundamental pressure.” He forecast the dong will be devalued by 2 percent next year.
The currency is forecast to drop 3 to 4 percent next year with the central bank’s reference rate above 23,000 dong a dollar, Saigon Times reported last week, citing information from Bank for Investment and Development of Vietnam’s research center.
Vietnam’s five-year government bond yield dropped one basis point to 6.65 percent, according daily fixings from banks compiled by Bloomberg. The three-year yield was steady at 5.93 percent.

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