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Strategy: VND to remain supported despite RMB move

07/08/2019 - 08:37

Strategy — VND to remain supported despite RMB move

RMB depreciation remains the key risk to the Vietnamese Dong.  As noted in our long-form strategy report “Whither the VND?” (June 7), we view sharp depreciation of the RMB as a key risk to the Vietnamese Dong amidst broadly supportive endogenous macro conditions. With the RMB crossing the perceived line-in-the-sand of 7 to the USD, it is possible that our 2% YoY depreciation assumption for the VND could be subject to moderate downside risk. However, the VND has been notably stable during most recent periods of RMB weakness, and we do not believe a currency rout is a likely scenario here.

Endogenous support persists for the VND given strong FDI and portfolio inflows, relatively low inflation, reasonable interest rate differentials, adequate FX reserves, and our expectation for current account stability (vs a volatile history). For details, please see our June note linked above.

RMB is the key risk to the VND, in our view, but the currencies do not move in lock-step. During six periods of RMB weakness since 2014, the VND has typically been flat or even increased vs. the USD. This time is not likely to be different given the politically charged global environment and Vietnam’s position on the US’ currency manipulator watchlist. We continue to expect 2% annual VND depreciation (vs the YTD fall of -0.42%).

Sharp RMB depreciation is not our base case. The RMB’s fall to below 7 could drive expectations of further depreciation. But China also faces food price inflation, banking system troubles, and the potential for renewed capital flight. We believe that more rapid easing by a compliant Fed is more likely than a sharp RMB depreciation in 2H19. This should at least ease pressure on emerging market currencies such as the VND, and potentially reduce market volatility as well.

We retain our cautious market view. Although the market is likely to rebound today (July 7), global conditions are likely to remain especially choppy for the short term. Thus, despite Vietnam’s position as a key FDI winner, we think the market will remain under pressure for at least the next few weeks. Therefore, we advise waiting for a better entry opportunity to emerge, perhaps in September. Our top picks remain VHM in property, a barbell approach in the banks (VCB and STB), and PVD among the small caps.