Key Points

• We raise our USDVND forecasts further to 24,800 in 3 months, and 24,700 in 12 months, up from 24,300 and 24,000 previously. Our forecasts imply continued underperformance of VND against Asian currencies (see Chart 1).
• We changed our view on VND last month, and saw the balance of risks tilting towards front-loaded moderate weakness in VND (see Vietnam: Moderate FX weakness from low rates and smaller trade surplus).
• In many ways, the three factors driving VND weaker which we highlighted in our previous report are still very relevant. First, low domestic interest rates, and with that depressed RHS FX hedging costs (Chart 3). Second, a pickup in imports leading to smaller trade surplus, driven in part by a rise in oil prices. Third, an acceleration in inflation, which has driven down domestic real interest rates.
• What’s changed since then are two factors. First, global oil prices have picked up by more than we assumed, and driven by a prolonged production cut by Saudi Arabia and Russia. This has put further pressure on Asian oil importers, including VND. Second, the US Dollar has been stronger than implied in our assumptions, driven by weakness in EUR in particular.
• Domestically, we also highlighted that there is a good chunk of FX flows we cannot measure in Vietnam. There is certainly a possibility that capital outflows and USD hoarding have picked up again, especially with US rates still high and US Dollar deposits not paid interest rates in Vietnam.
• Nonetheless, it’s important to stress that we still do not expect sustained sharp VND weakness akin to what we saw in 2022, and our forecasts for USDVND to stabilise in 2024 reflect that. We expect the Fed to pause and cut rates into 2024, commodity prices to eventually stabilise, and domestic demand recovery in Vietnam to be gradual, leading to a still decent trade surplus.