Vietnamese Dong: Constructive but upside constrained – Commerzbank

Commerzbank's Asia FX team expresses a constructive near-term outlook for the Vietnamese Dong (VND), driven by robust Foreign Direct Investment (FDI) inflows and solid economic growth. The USD/VND rate remains steady around 25,994, marginally below its July peak, indicating that the VND is approximately 1.2% stronger year-to-date.

Nevertheless, factors such as rising oil prices, an expanding trade deficit, and higher US yields are expected to curb substantial appreciation. The Shanghai Banking Corporation (SBV) is concentrating on striking a balance between supporting growth and managing inflation.

In September, the Consumer Price Index (CPI) increased by 5.1% year-over-year (yoy) compared to 4.9% in August, meeting market forecasts. This trend has pushed the average inflation rate in January–September to 4.52%, slightly above the government's 4.5% objective. The SBV is likely to continue focusing on fostering growth while controlling inflation and maintaining banking-system liquidity and exchange-rate stability, as higher inflation and rapid credit expansion suggest a supply-driven increase in headline CPI remains primarily driven by increased costs.

However, as capital formation surpasses 20% and consumption continues its strong growth, emerging capacity constraints and higher oil prices are starting to raise concerns about demand-side inflation risks, diminishing the SBV's capacity to provide further monetary assistance despite the government's ambitious growth aspirations.

During the Asian session on Thursday, USD/VND steadied near 25,994, remaining under its July high of 26,340, which means the VND is approximately 1.2% stronger against the USD year-to-date. Geopolitical risks, along with hawkish Federal Open Market Committee (FOMC) minutes and elevated US bond yields, have bolstered the US Dollar and restrained the USD/VND pair.

Similar trends are impacting the USD/JPY, which has retreated from a one-and-a-half-week peak, sliding below 158.00 during the Asian session due to expectations of potential yen support from authorities. Concurrently, the US Dollar has reached an 18-month peak, driven by Wednesday's hawkish FOMC minutes and the risk of an escalating Middle East crisis, further supporting the currency.

Meanwhile, gold experiences a mild negative bias around $4,100 as hawkish FOMC minutes solidify the belief of at least one more rate hike before the year concludes, and growing US bond yields suppress the non-yielding precious metal.