Interest rates and exchange rates both drop shockingly: How much further will they drop?

Interest rates and exchange rates simultaneously dropped shockingly.

In the last days of November and the beginning of December, all markets focused their attention on gold as this precious metal continuously increased in price and found its all-time high. Gold was supported by interest rates and exchange rates falling sharply.

First of all, from interest rates, most recently, the Joint Stock Commercial Bank for Foreign Trade of Vietnam ( Vietcombank ) - the big brother of the banking industry has brought savings interest rates to a new "bottom" very low. Accordingly, the 1-month term interest rate at Vietcombank is only 2.4%/year, the 6-month term is 2.7%/year. The highest rate is only 4.8%/year applied to terms of 12 months or more.

For a 12-month term, the lowest interest rate belongs to An Binh Commercial Joint Stock Bank (ABBank) at 4.2%/year. The remaining units are listed at common rates from 5.3%/year to 5.7%/year.

While the gold market is "feverish", both interest rates and exchange rates "hold hands" and decrease sharply. Illustrative photo

The sharp drop in interest rates has contributed to a more “calm” exchange rate. After a sharp increase at the beginning of the year, the USD/VND exchange rate has recently been “reversing”.

Closing this week, the USD/VND exchange rate at Vietcombank was listed at: 24,110 VND/USD - 24,450 VND/USD, down 280 VND/USD, equivalent to 1.13% compared to the last session of October.

Vietnam Joint Stock Commercial Bank for Investment and Development ( BIDV ) fixed the USD price this week at: 24,145 VND/USD - 24,445 VND/USD. Thus, after 1 month of trading, the exchange rate at BIDV has decreased by 270 VND/USD, equivalent to 1.1%.

At commercial banks, the greenback also had a similar downward trend. Vietnam Technological and Commercial Joint Stock Bank ( Techcombank ) adjusted the USD/VND exchange rate down by 279 VND/USD, equivalent to 1.13% to 24,130 VND/USD - 24,450 VND/USD.

It can be seen that as the mobilization interest rate cools down, the USD/VND exchange rate also cools down. And conversely, the exchange rate does not increase, which does not put pressure on the interest rate.

Will it continue to decline?

Vndirect Securities Company assessed that the pressure on the USD/VND exchange rate has cooled down as the US Federal Reserve (Fed) has a less hawkish view on monetary policy.

In the most recent meeting of the Fed in early November, the Fed continued to keep the operating interest rate unchanged in the target range of 5.25-5.50%. This is the second consecutive meeting that the Fed kept the operating interest rate unchanged after the previous long-term increase. Following that, the US CPI index in October as well as the newly announced Producer Price Index (PPI) were both lower than market expectations.

“Therefore, the market is leaning towards the scenario that the Fed will pause interest rate hikes at the next meeting in December 2023 and cut interest rates as early as the second quarter of 2024,” Vndirect forecasts.

As of November 13, 2023, the US dollar index DXY had fallen to 105.6 points, down 1.2% from its recent peak just before the Fed's November meeting.

A weaker DXY has pushed the USD/VND exchange rate down to 24.383, thus down 0.9% from its recent peak on 26 October 2023 (still up 3.2% YTD). Since the start of the year, the USD has appreciated against most regional currencies, notably the Philippine Peso (up 0.6% YTD), the Thai Baht (up 3.9%), the Chinese Yuan (up 5.4%) and the Malaysian Ringgit (up 6.9%).

The USD/VND exchange rate is expected to continue to cool down in late 2023. Illustrative photo

“We expect the USD/VND exchange rate to continue to cool down in the final period of 2023 as the Fed may pause its interest rate hike cycle and expect the USD/VND exchange rate to fluctuate in the range of 24,300-24,400. We see a number of factors supporting the stability of the dong, including: a record high trade surplus, a high current account surplus and stable FDI and remittances,” Vndirect analyzed.

According to Vndirect, the reduced exchange rate pressure has created conditions for the State Bank to pump the previously net amount of money into the market through the OMO channel. This move has temporarily dispelled market concerns that the State Bank will reverse its monetary easing policy due to exchange rate pressure.

Also according to Vndirect, deposit interest rates continue to decrease. Deposit interest rates have returned to low levels, as seen during the COVID-19 period (2021- 6T22) due to excess system liquidity in the context of weak credit demand.

As of October 31, system-wide credit only increased by 7.39% compared to the beginning of the year, far from the target of 14% for the whole year of 2023. In addition, the Government also promoted public investment and fiscal expansion, thereby pumping more money into the economy.

“We expect the average 12-month deposit interest rate to be at 5.2% per year by the end of 2023. We also expect lending interest rates to continue to decline in the last months of this year thanks to the rapid decline in funding costs of commercial banks recently,” Vndirect expects interest rates to continue to decline.

Source: https://www.congluan.vn/lai-suat-ty-gia-dong-loat-giam-soc-con-giam-den-dau-post274871.html