Why the Central Exchange Rate is Anchoring High, Bank USD Remains Stable, and the Black Market Plummets

Vietnam’s foreign exchange market is currently exhibiting a fascinating divergence, with the central exchange rate reaching an 11-month high, commercial bank USD rates holding steady, and the unofficial "black market" rate experiencing a significant decline. This complex interplay of forces reflects both the State Bank of Vietnam’s (SBV) proactive management strategy and the underlying supply and demand dynamics within the economy. Experts suggest that this seemingly contradictory trend is a deliberate and effective outcome, aimed at fostering stability and confidence amidst global economic pressures.

A Detailed Look at Exchange Rate Movements

The State Bank of Vietnam (SBV) has been actively adjusting its central exchange rate, which serves as a crucial reference point for commercial banks. In the latest reported session, the SBV listed the central rate at 25,254 Vietnamese Dong (VND) per US Dollar (USD), marking a continuation of an upward trend for five consecutive sessions. This movement reflects an increase of approximately 50 VND since the beginning of the current month. This aggressive adjustment has pushed the central rate to its highest level in 11 months, a strategic move by the central bank to create a "buffer zone" in anticipation of potential foreign exchange pressures towards the end of the year.

The central exchange rate is a key tool in the SBV’s monetary policy arsenal, announced daily and used by commercial banks to determine their USD buying and selling rates within a permissible band of +/- 5%. This band currently allows banks to trade the US Dollar within a range of 23,991 VND to 26,516 VND. The calculation of this central rate considers various factors, including interbank market developments, the exchange rates of major trading partners, and broader policy objectives.

Despite the central rate’s upward trajectory, the USD exchange rate at commercial banks has remained relatively stable. Major banks like Vietcombank and VietinBank were observed selling USD at approximately 26,475 VND and 26,490 VND, respectively, by the end of the recent week. While these figures represent a slight increase of about 30 VND compared to the beginning of the month, they remain well within the permitted trading band and notably lower than the record highs seen in certain periods, such as August of the previous year, when the exchange rate experienced significant spikes. Smaller commercial banks have reported even more stable rates, with transactions typically occurring within 4-4.5% of the permitted band, indicating ample room before hitting the ceiling.

In stark contrast to the official and commercial bank rates, the unofficial or "black market" USD rate has taken a sharp downward turn. Black market USD was trading around 26,370-26,410 VND per dollar, a significant drop of up to 200 VND since the beginning of the month. More dramatically, this represents a substantial 1,750 VND decrease from its peak in late March, when the black market rate soared to 28,150 VND per dollar. This translates to a decline of approximately 6% for the greenback in the informal market, underscoring a dramatic shift in sentiment and liquidity.

Expert Analysis: Deciphering the Divergence

The seemingly contradictory movements across the different exchange rate channels are not illogical, according to experts. Associate Professor Dr. Nguyen Quoc Anh, a senior lecturer at the Banking Faculty of Ho Chi Minh City University of Economics, explains that this divergence is a direct result of the SBV’s proactive and controlled management strategy interacting with the actual supply and demand dynamics of the market.

The SBV’s Proactive Defense Strategy

Dr. Quoc Anh highlights that the SBV’s continuous elevation of the central exchange rate is a preemptive defense mechanism. This strategy is primarily driven by the strong recovery and appreciation of the US Dollar globally. The DXY index, which measures the US Dollar’s strength against a basket of major currencies, has risen by over 2.5% since the beginning of the year. This global appreciation puts pressure on local currencies, including the VND. By gradually increasing the central rate, the SBV is "chasing" global trends in a controlled manner, aiming to manage expectations and prevent sudden, sharp depreciation of the VND. This approach helps to absorb external shocks and maintain stability in the domestic market.

Furthermore, this proactive adjustment plays a crucial role in bolstering investor confidence. At a regular press conference earlier this month, the regulatory body described these outcomes as "very encouraging results," emphasizing their role in enhancing trust among investors, particularly foreign investors, in Vietnam’s domestic market stability. This stable environment is critical for attracting and retaining foreign capital. United Overseas Bank (UOB), in a report released last week, echoed this positive assessment, commending the SBV’s "prudent and flexible approach" in managing the domestic currency’s depreciation pressure without causing undue volatility in the market.

Market-Driven Dynamics in Commercial Banks and the Black Market

In contrast to the SBV’s policy-driven central rate, the USD rates at commercial banks and in the black market are predominantly determined by the actual supply and demand of foreign currency within the economy. Dr. Quoc Anh points out that the current foreign currency supply is abundant, thanks to several robust inflows. These include strong remittances from overseas Vietnamese, a resurgence in tourism activities following the post-pandemic recovery, and the decisive disbursement of foreign direct investment (FDI). Vietnam has been a consistent magnet for FDI, with significant capital flowing into various sectors, contributing substantially to foreign exchange reserves.

Concurrently, the demand for foreign currency has been relatively subdued during the mid-year period. This is typically a quieter phase for imports, with major import surges to meet year-end consumption and production needs usually concentrated in the fourth quarter. With supply currently outweighing demand, commercial banks have been able to maintain a stable USD exchange rate, well within the permissible trading band, without needing to push towards the ceiling.

The Role of Interest Rate Differentials

Another significant factor contributing to the stability of bank exchange rates and the decline in black market activity is the interest rate differential. Currently, interest rates on USD deposits in Vietnam are effectively at 0%. In contrast, VND mobilization rates have shown an upward trend. This widening gap in interest rates discourages speculative activities involving the exchange rate, as holding USD yields no interest while holding VND can generate returns. Analysts from VNDirect Securities Company note that this encourages foreign enterprises to retain their profits in VND for reinvestment, capitalizing on the higher interest rates available, thereby further contributing to the stability of the local currency.

The Plummeting Black Market: Shifting Sentiment and Accessibility

The sharp decline in the black market USD rate is largely attributed to a bearish shift in speculative sentiment. Dr. Quoc Anh explains that daily foreign exchange transactions through official banking channels have become increasingly convenient and accessible. This, combined with the public’s growing aversion to the legal risks associated with unofficial markets, has significantly reduced the demand for black market USD. Whereas in March, the black market rate was approximately 1,800 VND higher than bank selling rates, it has now not only converged but, in some instances, fallen below the selling rates offered by commercial banks. This effectively eliminates the arbitrage opportunity that previously fueled black market activity.

Adding to this, Ms. Ly Thi Hien, Head of High-Net-Worth Client Analysis at Yuanta Vietnam Securities Company (YSVN), notes that the domestic and international gold markets have also influenced the black market USD. Gold prices have seen declines of 2-4.5% year-to-date globally and domestically. This downward trend in precious metals further dampens the incentive for individuals to hoard USD outside the banking system, thereby reducing short-term pressure on the exchange rate. Ms. Hien, however, cautions that further sharp declines in the black market rate are unlikely, as it has already reached or fallen below commercial bank selling prices.

Outlook and Forecasts for the Coming Months

Looking ahead, experts anticipate increased volatility in the foreign exchange market from September onwards. Dr. Nguyen Quoc Anh predicts that the exchange rate will fluctuate more rapidly and significantly during this period. This expectation is primarily driven by critical external information, such as the US Federal Reserve’s interest rate decisions and geopolitical events, both of which directly impact the strength of the US Dollar (DXY). Domestically, foreign currency demand is also projected to rise sharply in the fourth quarter as businesses increase imports to stock up for the year-end shopping season and production cycles.

Despite the anticipated fluctuations, many analytical teams concur that the exchange rate movements will remain within the SBV’s control. VNDirect Securities Company forecasts that the exchange rate for the year will fluctuate within a narrow band of 1-2%, underpinned by an improving foreign currency supply. This improvement is attributed to strong FDI disbursement, robust export growth, and an increasing trend of international borrowing by domestic banks and enterprises.

Ms. Ly Thi Hien shares a similar perspective, suggesting that the foreign exchange rate through the banking channel will remain stable or see only slight increases in the short term. She notes that the US Dollar continues to be bolstered by geopolitical risks and expectations surrounding US interest rates, making a significant downward reversal difficult. However, any upward pressure is expected to be limited by stable VND liquidity and the declining black market rate.

UOB presents an even more optimistic long-term forecast, predicting a gradual strengthening of the Vietnamese Dong (meaning a decrease in the USD/VND exchange rate). Their projections place the exchange rate at approximately 26,500 VND in Q3 and 26,400 VND in Q4 of this year. Looking further ahead, they anticipate a rate of 26,300 VND in Q1 2027 and 26,100 VND in Q2 2027. This positive outlook is based on a strong macroeconomic environment, the SBV’s effective exchange rate management within its trading band, and the potential upgrade of Vietnam’s stock market to emerging market status from late September. Such an upgrade is expected to attract tens of billions of US dollars in foreign indirect investment (FII), further bolstering foreign currency reserves and supporting the VND.

Implications for Businesses

For businesses, these developments carry distinct implications. Dr. Quoc Anh advises importers to take advantage of the current relatively lower exchange rates to optimize their payment costs. However, he also stresses the importance of closely monitoring the central exchange rate’s upward trend to prepare for potential increased volatility and avoid being caught off guard during the final three months of the year.

Conversely, exporters, who receive foreign currency and then convert it back to VND through banks, should proactively manage their risks. Dr. Quoc Anh recommends utilizing derivative instruments such as forward contracts or currency swaps to hedge against adverse exchange rate movements and ensure predictability in their earnings.

In summary, Vietnam’s foreign exchange market is navigating a complex global landscape with a nuanced and largely controlled approach. The SBV’s strategic management, coupled with favorable supply-demand dynamics and prudent interest rate policies, has resulted in a stable official market despite global USD strength, while effectively curbing speculative activity in the informal sector. This multifaceted strategy appears poised to maintain stability and foster confidence as the year progresses.