Johanna Dee Chua
Emerging Markets Trading Strategy
Citigroup Global Markets Asia
Effective tomorrow, SBV will widen the dong trading band to +/-2% from +/-1%-- this is nothing new and plans of doing this was widely known. Using today's official rate (16,451), the last grey market rate (17500/17800) quoted prior to the news is still over 5% weaker than the likely revised weak side of the band (assuming tomorrow's official VND rate is same as today's).
However, in an accompanying regulation, SBV has now prohibited banks from using third party currencies (typically EUR or JPY) to get around the official rate, which is how interbank players onshore have been getting around the "official band".
Unless SBV supplies sufficient USD to the local banks to drive the grey market rate towards the top end of the revised band **OR** they re-peg the official VND rate over 5% weaker to accommodate the grey market rate within the band, then the FX market will essentially freeze. Without corrective steps from SBV, we think this is tantamount to capital control as foreign investors will be unable to convert their VND to USD to repatriate funds. Worse still, it could disrupt trade and long-term investor flows (though we expect SBV would largely be supplying USD to importers)
Market impact: The widening of the VND trading band is non-news, but the crackdown on the third-party currency trades, if draconian-ly enforced, without supplying USD liquidity or adjusting the official rate at least 5% weaker, is negative news and would further dampen any incremented capital looking to come in unless SBV corrects the market dis-equilibrium. We await more details on how things will work tomorrow....
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