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Liquidity condition in the money market remains ample under SBV’s effort to lower lending interest rates to facilitate domestic production. Money continues flowing into the banking system with a massive T-bill maturity without being rolled over. Thus, the interbank rate reduced across the curve this week. Turning into the FX market, USDVND increases further under the DXY resurgence. However, thanks to the steady trade surplus in recent months, we foretell the exchange rate to be stable despite the increasing possibility that Fed will provide a 25bps hike in the meeting two weeks later.

Indicators in May seem to characterize a turnaround in Vietnam’s economy when export and production activities experienced significant improvements. In addition, domestic consumption sustains its strong growth with well-controlled inflation, adding confidence about the bright economic picture soon. May also reveals a better situation in foreign investment when the global rate hike seems to step into the end phase.

The money market witnessed another uneventful week with minimal fluctuations in interbank rates, G-bond yields, and the USDVND exchange rate. Although this week marked the beginning of a wave of T-bill maturities, the overnight (ON) interbank rate experienced a slight decline. Banks tend to refrain from reinvesting the maturing T-bills, leading to soft liquidity pressure in the upcoming weeks. Turning to the FX market, the exchange rate remained steady, supported by a strong trade surplus despite a notable recovery in DXY. The stability in the FX market will provide SBV with room to implement future easing measures.

The global condition has exerted pressure on the stock market in the short term because (1) companies have faced difficulties in 1Q23 and (2) the corporate bond market poses future financial pressure. We expect two scenarios may unfold. Firstly, in the bullish scenario, the VNIndex can reach 1,220 pts in 2H23. Secondly, the bearish scenario suggests the VNIndex retest the zone of 780-910 pts.

The liquidity condition generally improves after the holiday with lower interest rates for short-term loans and increased traded value, and G-bond yields tend to reduce for first and second markets. The development in the money market continues to reflect the government’s efforts in promoting credit activities to support domestic enterprises after the economy experienced a depressed performance in the first quarter. Furthermore, USDVND remains stable in the late phase of the Fed's rate hike, providing Vietnam’s monetary authority more confidence to follow easing decisions.

Vietnam's money market this week shows a modest but implicit move even just with two trading days. On one hand, interbank rates tend to increase when the liquidity condition seems to need more time to stabilize after a long holiday. On the other hand, USDVND is flat although one more 25bps increase in the Fed fund rate was released. Furthermore, the 10-year G-bond yield declined for the fourth consecutive week although. Therefore, we predict that participants might await more easing signals from the monetary authority after a depressed set of economic indicators for April.

April shows the adverse impact of weak global demand, under the high-interest rate environment, on Vietnam's economy was still effective. Export decline persists this month, even with a higher rate than in March under the weak 1Q23 revenue from GVC leaders whose factories were heavily located in Vietnam, such as Samsung Electronics. Furthermore, industrial production grows modestly from reducing significantly in the previous month due to the robust domestic demand. On the upside, inflation continued to be well-controlled and retail sales performed impressively, providing support for economic growth in 2Q23.

Liquidity pressure in the money market cooled down this week when the short-term mismatch in the TGA auction was partly resolved. On the other hand, 10-year G-bond yield and average deposit rates from SOBs were mainly unchanged after reducing significantly a few weeks ago, implying that the impact of recent policy rate cuts was fading and market participants likely await more signals from Vietnam’s central bank. Besides, USDVND has rebounded slightly when hitting SBV’s buying level.

1Q23 shows the negative impact of the weak global demand on Vietnam’s economic activities, with a slowdown and even a reduction in export-related sectors. The export and export-oriented production saw significant declines in the first quarter of 2023, and the fruitful consumption in the first normalized Tet could not reverse the slowdown. On the upside, we saw improved industrial production, less severe trade performance, a tourism return, and well-controlled inflation in March, providing hope that economic activities would accelerate in the next quarter.

The money market is in the early stage of the potential reversal of the first lending market after two rounds of policy rate cuts SBV delivered in March-mid. Accordingly, deposit rates have declined for mid-term tenors (from one month to below six months). This development could facilitate commercial banks to lower lending rates, causing lending activities to improve next month. As per liquidity condition, the overnight interbank rate surged this week, likely attributed to the potential mismatch between depositors and banks in the first stage of interest rate reversal and increasing demand for reserves in the upcoming long holiday.