Currencies, Emerging Markets, Frontier Markets

Yuan Contagion: Vietnam’s Central Bank Devalues Currency For Third Time In 2015

Vietnamese Dong - WordPressVietnam’s Central bank has devalued the nation’s currency on Wednesday for the third time this year and widened the its trading band, in the latest sign of stress in Asian exchange rates following a move last week by China to devalue its currency.

The State Bank of Vietnam weakened its currency reference rate by 1 percent and increased the scope for fluctuations to 3 percent on either side, after doubling the range on August 12 following China’s initial depreciation of the yuan.

Following the move, Vietnam’s currency fell 1.3 percent, which extended its drop this month to around 2.6 percent, according to Bloomberg.

Malaysia’s ringgit has fallen the most in Asian currencies in August as it has tumbled over 6 percent.

The decision comes as Vietnam’s Prime Minister Nguyen Tan Dung is looking to safeguard the nation’s export growth as his Central Bank is also concerned with the prospects of the U.S. Fed hiking interest rates.

Vietnam’s latest devaluation will allow for its currency to weaken without pressuring its Central Bank to intervene, however further policy measures can’t be ruled out should the yuan depreciate sharply.

So far this year, Vietnam’s currency has fallen 4.5 percent, which puts the country’s exporters at a relative disadvantage to those in nations like Malaysia and Indonesia, whose currencies have fallen 15 percent and 10 percent, respectively, Bloomberg notes.

“The Vietnamese dong has been one of the more resilient currencies amidst the EM Asia currency downdraft of recent months,” ANZ analysts said. “Some realignment of the currency therefore seems warranted from a macro-balance perspective,” they wrote, adding that the dong could depreciate by a maximum of 5.1 percent in 2015 compared with annual declines of about 1.3 percent in the previous two years.

Vietnam’s economic growth jumped following a currency devaluation in January and May by 1 percent each time. This followed similar-sized cuts to its currency fixing in both 2014 and 2013.

“Today’s move is a very good policy action,” Le Anh Tuan, Chief Economist at Dragon Capital Group, told Bloomberg. “It will make the currency more competitive and help boost exports.”

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