Research Center

This week, the money market observed enduringly low interbank rates for the fifth straight week, with only slight gains seen in the banking system's lending activity. The SBV's continued to keep the OMO inactive for a second consecutive month, resulting from ample liquidity and the government's easing stances. The USDVND exchange rate faces upward strain due to heightened demand for carry trades, driven by prolonged USD-VND negative interest rate gap.

The money market continues to witness the persistence of super-low interbank rates for the fourth consecutive week, accompanied by only marginal improvement in the lending performance of the banking system. The SBV has maintained its inactivity in the OMO for the second consecutive month, driven by excess liquidity and the government's preference for easing measures. The USDVND exchange rate remains under upward pressure as demand for carry trade activities increases, primarily due to the negative spread in interest rates between the VND and USD. Additionally, the uptrend in U.S. and Japanese G-bond yields exerts further pressure on the exchange rate.

The super-low interest rate phenomenon in the money market endures for the third consecutive week when lending performance in the first market improved insignificantly. SBV held its OMO inactive for the second consecutive month under the liquidity excessiveness and the government’s preference for easing measures. On the FX market, USDVND continued facing upward pressure when the negative spread in interest rate between the dong and the greenback was mounting demand for the carry trade activities. However, the increase in the exchange rate was moderate under the strong supply stemming from trade surplus and FDI inflow.

July’s data revealed a substantial improvement in economic activities with a softer decline in export turnover, an improving industrial production, and a renewed acceleration in retail sales. On one hand, U.S. consumers tend to regain their confidence during the late phase of the global interest rate hike, fastening the resolution of the overstocking and consequently promoting Vietnam’s export activities. On the other hand, retail sales recorded a higher growth rate than in June coupled with moderate inflation after a series of easing fiscal policies, likely reflecting an expanding demand. We predict economic performance to improve further next month due to softening external headwinds and expanding domestic demand.

Although the economic performance picked up in 2Q23 in the late stage of the global interest rate hike, we believe that the acceleration of economic activities will need more time to be material due to the insignificant improvement of external factors and the weakening recovery in domestic consumption. On the upside, public investment will continue to be a spotlight in 3Q23 thanks to the government's effort in realizing the significantly higher workload than last year. In addition, the well-controlled inflation and stable exchange rate provide more space for the monetary authority to follow the easing tendency in the next quarter.

Cheap money, in terms of interbank loans, persists this week when modest improvement in lending activities cannot offset the funds increase from banks through recent bond issuance. Hence, SBV’s intervention in OMO was redundant in the situation of the government’s urge for more dovish actions and liquidity excessiveness. We predict the cheap money phenomena in the money market to endure unless the loan performance improves significantly or Fed reveals a more hawkish than expected decision, threatening the stability of USDVND.

Despite the pickup in June lending performance, the excessive liquidity in the banking system persists mainly due to the government’s urge for more dovish actions from SBV to bolster economic activities and the abnormal value of bond issuance from banks in recent weeks. Hence, the ON interbank rate hit its three-year low at 0.07%. At the same time, the bright U.S. inflation readings help alleviate the upward pressure on USDVND over the week. Overall, we expect a further dovish movement from SBV in the upcoming weeks to support economic growth when the slowdown in U.S. inflation becomes more visible.

The interest rate in the money market this week hovered on its historic low under the soft liquidity condition with ON slightly increasing by 7bps to 0.40% and 1W dropping by 25bps to 0.72%. As a result, the upward pressure on USDVND endures due to the persistently negative VND-USD interest rate spread. We predict that the phenomenon of a super-low funding cost to persist to promote economic activities for the few next weeks unless the pressure on exchange rate stability becomes significant.

The money market experienced significant fluctuations this week as several factors contributed to the volatility. The overnight interbank rate reached its lowest point in two years, while the widening interest rate gap between the US dollar and Vietnamese dong added pressure on the exchange rate. G-bond yields diverged between primary and secondary markets, and OMO remained inactive. Although credit growth showed positive momentum by the end of June, abundant liquidity persisted. Looking ahead, we anticipate further depreciation of the Vietnamese dong, adding challenges for Vietnam monetary authority to stimulate the economy.