Thematic Report

China is currently the largest trading partner of Vietnam, the devaluation of CNY has created a great pressure on VND movements; and a pressure to the monetary policy of SBV to protect competitive advantages of exports, as well as the production capacity of domestic enterprises against imports from China. We believe that the target of the SBV is to maintain a moderate trend of VND devaluation compared to the USD (although the VND still goes up against the basket of currencies) at about 2%. This level is enough to partly neutralize the adverse impacts on the strong depreciation of the RMB, but still creates a safety buffer to make sure the 3% target, set at the beginning of the year, will not be violated. However, we realize that the pressure of VND devaluation in the coming time is not high due to the following main reasons: (1) Based on the observation of the above technical changes of NEER & REER (Figure 3), the 106 is no longer considered a psychological threshold for VND devalua

Highlights: The VND’s depreciation level was 1.04% YTD by May 31, but the movements of exchange rates on the interbank and unofficial markets were quite different compared to those in the previous period. The main reasons leading to the depreciation of the VND include external factors such as escalating trade tensions between the US and China and the temporary supply constraints of foreign currencies. Outlook: It is forecast that the VND will depreciate 2.0 – 2.5% in the fundamental scenario.