SBV ushers in new forex rate mechanism

The new forex rate is weighted against eight major currencies

The State Bank of Vietnam (SBV) issued Decision No. 2730-QD-NHNN, adopting a market-oriented daily reference rate starting January 4, 2016, for which the rate is calculated based on a weighted average value of the dong on the prior trading day and the prices of eight major foreign currencies from countries having a large volume of trade and investments with Vietnam.

The eight currencies are the US dollar, the Chinese yuan, the euro, the Japanese yen, the South Korean won, the Singapore dollar, and the Thai baht.

“Although the daily rate is driven by market factors, it will stay under the SBV’s control, and the central bank will try to avoid causing forex rate fluctuations,” said SBV Deputy Governor Nguyen Thi Hong.

The trading band for the forex rate remains at 3 per cent, as previously set with the “fixing rate”, meaning the dollar can fluctuate as much as 3 per cent on either side of the daily reference rate. The reference rate will serve as a guide for banks to regulate their own forex rates.

“The new forex rate mechanism is, in my opinion, very positive, as it is now based on market forces and is therefore less imposing than the previous one,” said Vo Tri Thanh, former vice director of the Central Institute for Economic Management (CIEM). “It is a constructive step with a long-term vision in mind.”

Following the SBV’s announcement on the new forex mechanism, the daily reference rate edged up VND6 to VND21,896 per dollar last Monday, from the previous rate of VND21,890. The rate was boosted to VND21,919 per dollar on Thursday, an increase of VND12 compared to Wednesday’s rate. It settled at VND21,909 per dollar on the last trading day of the week.

While lauding the new forex mechanism, CIEM’s Thanh noted that it could create hitches for local businesses in terms of adapting to the frequent fluctuations of the forex rate, as the country’s financial market was not yet an ideal one.

“It therefore comes down to two important solutions, with one being the participation of the SBV and commercial banks in the development of the derivatives market,” he said. “And two being the SBV increasing its supervision over the forex market, in order to ensure efficient market operations and avoid any harsh volatility.”

Bui Quoc Dung, director of the Monetary Policy Department under the SBV, during a briefing with local press last week introduced three-month dollar forward contracts to commercial banks, at the dollar selling price set by the SBV on December 31, 2015, plus an additional 1 per cent. Commercial banks also have the option to cancel the forward contracts during the three-month period, he added.

“Selling forward contracts along with the new forex mechanism will help the SBV settle expectations among credit institutions, identify the target zone for forex adjustments, and at the same time match forex supply with the development of demand,” Dung stressed.

“The new mechanism will facilitate foreign currency trading and enterprises will be exposed to less currency risk,” he added.

According to the SBV, in acquiring the forward contracts, businesses will gain double benefits, namely protection over forex risk and lower fees paid to banks for derivative products.