April 21 (Bloomberg) — The Vietnamese dong, Asia’s worst-performing currency outside of Japan in the past month, will extend its drop as inflation at the quickest in more than a decade deters investors, HSBC Holdings Plc said.
The currency has slipped 0.7 percent this year, wiping out all of last year’s gain, as the nation’s stock index has plummeted 42 percent, the world’s worst performer. Record food and oil prices may widen the nation’s current-account deficit and curb corporate earnings growth.
“We see some near-term weakness,” said Richard Yetsenga, a foreign-exchange strategist at HSBC in Hong Kong. “The key concerns are that inflation and excessive domestic growth have been allowed to persist. Those pressures have flipped from dong positive to dong negative.”
ABN Amro Bank NV also said the dong will weaken in a report published last week, whilst Morgan Stanley’s currency strategist Stewart Newnham says his forecast of 4 percent gains this year “may have been too optimistic.” Goldman Sachs Group Inc. said the State Bank of Vietnam bought dollars March 25, which pushed the dong about 1.8 percent lower that week, aimed at making the nation’s exports more competitive.
The dong was at 16,110.5 as of 11:28 a.m. in Hanoi, and may slip 0.7 percent to 16,217 by the middle of the year, and end the year at 16,135, said Yetsenga.
There was an “acute” lack of onshore dollar supply last quarter due to foreign-loan repayments, remittances and increased trading volumes as exports and imports rise, said Morgan Stanley’s Newnham in a research note on April 15. “Onshore dollar funding pressures have undermined the dong and investors confidence.”
Economic growth slowed in the first quarter to an annualized 7.4 percent pace as the global economy cools and the nation’s inflation rate accelerates. Vietnam’s government said April 4 it plans to reduce its target for economic growth to 7 percent this year.
“The depreciation of the dong can be partly attributed to growing demand for dollars from rising imports and expectations that the central bank may have to hold down the value of the dong to bolster export growth,” wrote economist Helen Qiao in the Goldman Sachs report.
The dong is little changed since April 14 when the central bank said it will expand the dong’s daily trading band to 2 percent on either side of a daily fixed rate aimed at slowing the 19.4 percent inflation rate. It didn’t say when the State Bank of Vietnam will widen the band.
“The central bank will have to tighten monetary policy further to regain monetary control if it cannot allow any dong appreciation to curb inflation.” said Qiao at Goldman Sachs.