Research Center

The liquidity condition in the money market regained stability for the second week as the interbank market continued recording high trading volume despite the short-term funding cost being hard to be cheap as before. The foreign exchange this week suggests a few signals of a cooling upturn when SBV continuously provided minor adjustments in the selling price of the greenback, and interbank USDVND reduced further. However, we predict that the monetary authority will keep its eyes on developments in the forex market when the December FOMC is counting down.

The impact of weak global demand on Vietnam’s economy is highly observable this month when trade activities step into the red territory, and the resultant export-oriented manufacturing keeps decelerating. It is foreseeable that domestic production would slow down further when the global tendency of tightening monetary policy needs more time to pivot. External demand and subsequent new orders to contract manufacturers, including Vietnam, would remain gloomy. On the upside, domestic consumption remains favorable due to the upcoming shopping season, and inflation remains under control, allowing the government to pursue policies for economic growth.

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This week provides more evidence for the recovery in the money market, especially in terms of the trust, after a few weeks of SCB’s resolution. Interbank trading volume has increased significantly, likely indicating that participants are regaining confidence. However, the short-term funding cost is hard to return cheap when upward pressure on USDVND remains high. Hence, we predict the central bank to sustain OMO transactions at this price base to focus on forex stability.

Vietnam’s money market has eased this week with significantly lower interest rates for short-term tenors and a higher trading value, implying that traders have regained confidence after a few weeks of SCB’s resolution. SBV tends to lower its money injection when the liquidity condition in the banking system seems to loosen and redirects the attention to the FX market stability.

Although SBV sustains the support liquidity to commercial banks this week but with has a high funding cost under the pressure of USD outflow. The overnight interbank rate converges to the level that SBV offers in repo and T-bill transactions. We predict that the funding cost in the money market will remain high in the coming weeks.

Although SBV returns to support liquidity to its counterparties this week, funding cost in the money market has increased significantly in preparation for FOMC’s meeting in November. The development in the foreign exchange market remains tight as the interbank USDVND this week still anchors to SBV’s selling price, indicating that FX traders are watching closely to Fed’s decision this time. Due to the importance of the Fed’s interest rate decision in November, we predict that interbank rates in the Vietnam money market will remain high for several next weeks.

Vietnam’s economic performance in October reflects obviously the impact of global slowdown when the low-base effect was fading. Trade activities and export-oriented industrial production were decelerating under the fewer new orders and weaker external demand. On the upside, domestic consumption remains favorable under the improving labor market, and the inflation remains under control. Furthermore, the rebound in FDI registration is a plus point as it might reflect that foreign investors are regaining the confidence about the business prospect.

The increase in consumer spending in turn helps the economy sustain its expansion. If for some reason consumer confidence declines, consumers become less certain about their financial prospects, and they begin to spend less money; this in turn affects businesses as they begin to experience a decrease in sales.