Research Center

The money market this week continued to incorporate SBV’s recent pivot in monetary stance. Funding costs for interbank loans remain relatively low under the modest growth in the first lending market. More notably, the second round of rate cuts came out after depressing economic release for the first quarter with a focus on lowering deposit rates. In this way, the monetary authority could facilitate commercial banks to reduce lending rates in the first market. Despite a stronger pivot signal, the FX market reacts mildly, providing SBV confidence to follow policies to support economic growth. Therefore, we predict that interest rates in the money market to remain low for the next few weeks

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.

Interest rates in the money market continued to slide for the second week after SBV’s rate cut decision. The overnight interbank rate made another sharp drop this week to hit the year low and even was approaching the ultra-low region in the pandemic. Besides, USDVND remains stable, while the global FX market experienced a stormy week under the banking crisis. We predict funding costs in the money market to be low more when the central bank tends to navigate its monetary tools to support domestic production and economic growth at this time.

This week could provide a turning point in SBV’s monetary management as the central bank released a 100bps rate cut which could trigger a reversal of the interest rate path soon. The decision came out under the context that the global banking turmoil has increased significantly the possibility that Fed would be less hawkish in the March FOMC meeting. Interest rates in the money market responded strongly to SBV’s announcement with significant declines in interbank rates and G-bond yields. This week signals that SBV might switch the aim to economic performance when Fed’s rate hike trajectory could end sooner than expected and economic slowdown looms. Hence, we predict interest rates in the money market to be low in the next coming weeks.

The Chinese economy has made a rebound in 2023, with major economic indicators seeing steady expansion, offering the latest evidence that the world's second-largest economy is set to secure a powerful recovery this year. Investors and economists pay special attention to PMI reading each month to get a pulse on the world’s second-largest economy.

Vietnam’s money market remained stable heading to the release of U.S. CPI next week, a decisive consideration for the Fed’s monetary rate decision in March. Overnight interbank was steady at 6% when SBV withdrew money from its counterparties for the sixth consecutive month under slowing credit activities in the first market. For the next week, we expect that raising concerns about the U.S. banking crisis following SVB’s failure would relieve Fed’s hawkishness and put downward pressure on USDVND.

DXY was muted this week on the lack of highly impacted U.S. releases, while funding costs for the dong witnessed a strong rebound under the persistent SBV’s liquidity withdrawal. Hence, USDVND made a notable gain after six consecutive weeks of decline. Vietnam’s central bank likely continues to lean more on global development, especially the Fed's monetary tendency, to decide its OMO implementation despite a soft liquidity condition under the slowing credit performance in the first market. Therefore, we predict the central bank will sustain high funding costs in the money market heading into the coming talks of Fed officials next week.

The money market likely reflects SBV’s prudence under a more hawkish Fed in the hike rate trajectory. Although liquidity condition becomes soft under the slowing lending activity in the first market, the central bank offers longer-term T-bill contracts at a higher yield to preserve the dong’s attractiveness. Therefore, we expect SBV’s stance to remain prudent until Fed’s rate hike trajectory is less hawkish.

Vietnam’s economic picture remains gloomy after the Tet, although witnessing improvement in several sectors. The modest growths in domestic production and trade activities are primarily due to more working days than in the same period last year. After adjusting for the working day number, the impact of the weak global demand on the economy reveals predominant. On the upside, domestic consumption remains strong under the first normalized spring season. However, the impact of the wealth effect and income prospects could be negative under the current high-interest rate environment, raising our concerns about the motivation for economic growth for the first quarter.