Vietnam Widens Dong’s Trading Band After China Devalues Yuan

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Vietnam widened the dong’s trading band on Wednesday to allow the currency to weaken after China, its biggest trading partner, devalued the yuan.

The dong can now move as much as 2 percent on either side of a fixing set by the monetary authority, from 1 percent previously, the central bank said in a statement. The dong weakened 1 percent to 22,040 a dollar as of 2:16 p.m. in Hanoi. The central bank set the reference rate at 21,673, unchanged from the previous day.

The move follows two devaluations of the dong, by 1 percent each, in January and May. The action today is “to help the dong be more flexible” and maintain competitiveness’’ of Vietnamese products, as the yuan devaluation will have a negative economic impact, the State Bank of Vietnam said. Export growth slowed to 9.5 percent in the first seven months of 2015, compared with 14.1 percent in the year-earlier period.

“This is very timely policy action. The move today would help promote exports,” Alan Pham, chief economist at VinaCapital Group, Vietnam’s biggest fund manager, said by phone from Ho Chi Minh City. “Vietnamese exports have been under great pressure from the U.S. and EU markets.”

Export Growth

The country posted a trade deficit of $300 million in July. Vietnam is trying to prop up an economy that it projects will grow 6.2 percent this year, compared with 6 percent in 2014.

China cut the yuan’s fixing by a record 1.9 percent on Tuesday and a further 1.6 percent on Wednesday. The dong has declined 3 percent this year, compared with drops of 13 percent in Malaysia’s ringgit and 10 percent in Indonesia’s rupiah.

Australia & New Zealand Banking Group Ltd. said it was putting its year-end dong forecast of 22,050 a dollar under review, according to a research note by analysts including Irene Cheung released Wednesday. With the current-account deficit likely to widen, a slightly larger devaluation, compared with recent years, may be needed to avoid depleting foreign-exchange reserves, ANZ said in the note.

Vietnam devalued the dong by 1 percent in 2014 and by the same amount in 2013 via adjustments to the reference rate.

‘Natural Move’

“The State Bank of Vietnam will take comprehensive measures and policies to ensure stability of the dong and the currency market,” the monetary authority said in the statement. It will “closely watch developments in local and international markets, taking into account macro-economic forecasts to take suitable policy actions,” it said.

The yield on the five-year sovereign bonds fell seven basis points to 6.42 percent, according to daily fixings from banks compiled by Bloomberg. The three-year yield rose one basis point to 5.72 percent and the two-year yield rose seven basis points to 5.38 percent.

Widening the band is “a natural move for Vietnam,” said Attila Vajda, managing director at Project Asia Research, a Singapore-based advisory firm. “Its economy is dependent on exports and pegging its currency to a strong dollar leads to a loss of competitiveness.”

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