Currency Forecast - VND: To Outperform Forward Market Despite Downside Pressures - OCT 2017

BMI View: We forecast the VND to weaken in spot terms over the coming months as the SBV's accommodative monetary stance leads to narrowing real interest rate spreads against the US. That said, we expect the dong to outperform in total return terms on the back of a strong economic growth outlook and positive reform momentum , which should increase the fair value of the VND and support higher real interest rates.

Short-Term Outlook (three-to-six months)

The Vietnamese dong has remained fairly stable against the US dollar since the start of the year, even with the State Bank of Vietnam's (SBV) surprise rate cut on July 10, but we believe that this trend is unlikely to be sustained through end-2017. While strict capital controls and the central bank's disposition to manage the currency to anchor inflation and maintain confidence in the dong should see the unit remain stable over the near-term, narrowing real interest spreads relative to the US are likely to exert downside pressure on the VND in the coming months. In Vietnam's case, we expect the SBV to stand pat to support growth amid rising inflation; while in the US's case, the Federal Reserve is on the path to interest rate normalisation. Accordingly, we maintain our forecast for the dong to weaken to VND23,100/USD by end-2017, from a spot rate of VND22,729/USD.

Soft-Peg To Face Growing Downside Pressures
Vietnam - Exchange Rate, VND/USD
Source: BMI, Bloomberg

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