The US Dollar finished the week lower against almost all G10 counterparts, continuing its multi-month downtrend ahead of a critical week of economic event risk. A fairly disappointing revision to Q4 GDP capped a week of mixed data, and all eyes now turn to the coming week’s critical US Nonfarm Payrolls report. The NFPs release needs little introduction as one of the most market-moving reports across global financial markets, and February’s result will be particularly significant given January’s sharply below-forecast jobs figure.

A busy week of economic event risk will shape expectations and likely force sharp short-term moves ahead of the NFP release, and it will be critical to monitor financial market moves as the US Dollar nears significant lows against major counterparts. Consensus forecasts currently call for a respectable 190k jobs gain through the month of February—consistent with expectations of substantial improvements on January’s clear disappointment. We will watch earlier-week ISM Manufacturing, ADP Employment Change, Initial Jobless Claims, and ISM Services results to gauge the likelihood that February payrolls meet lofty forecasts. Uncertainty surrounding the future of US Federal Reserve monetary policy puts all eyes on whether a broader economic recovery will be enough to produce similar improvements in the domestic labor market.

The US Federal Reserve shows little urgency in withdrawing extraordinary monetary policy stimulus amidst generally weak inflation and lackluster jobs growth. Controversial Quantitative Easing measures have been a major driving force behind US Dollar weakness, and it could arguably take a substantial shift in the Fed’s stance and rhetoric to force a sustained Greenback recovery. In the absence of such a change, the US Dollar may need a broader shift in financial markets to drive a major reversal.

The S&P 500 saw a sharp pullback on a broader flight to safety on geopolitical turmoil in the Middle East, and the USD rallied as one of the world’s foremost safe-haven currencies. Yet a later bounce in stock markets suggests bulls have yet to give up the fight, and we may need to see a more sustained shift to make any serious argument for a market top (and US Dollar bottom). CFTC Commitment of Traders data shows that Non-Commercial traders (typically large speculators) remain heavily net-short the US currency on a steady downtrend. And though such one-sided sentiment typically occurs near major market turns, sentiment extremes are only clear in hindsight and extremely difficult to time.

Trend traders will likely favor continued US Dollar weakness into the week ahead, and it is difficult to make the case for a substantive turnaround absent a material improvement in USD sentiment. FX Options market risk reversals likewise suggest that many traders have continued to bet on and hedge against Greenback weakness. It would likely take a material improvement in US economic data or a similarly large turn lower in ‘risk’ to force a substantive USD bounce. Given that the first week of the month quite often sets the pace for subsequent trading, we will pay special attention to whether the US currency shows any real signs of recovery through March.

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Banks in Vietnam cut their dollar lending rates on the interbank market in the past week due to a growing surplus after firms switched to borrowing in Vietnamese dong under a government stimulus package, bankers said.

The State Bank of Vietnam said on Monday banks cut their dollar lending rates for nearly all terms in the week ending August 27. Rates on 12-month loans dropped to 1.7 percent from 2.8 percent the previous week. Many companies that needed dollars earlier this year have switched to borrowing in dong because of a government rate subsidy package, leaving banks with a surplus of the foreign currency, the official Securities Investment newspaper said. It said central bank measures to limit the use of the dollar in domestic markets had also helped reduce demand. On August 20 the central bank and the Industry and Trade Ministry agreed to tighten control over foreign exchange as dollar rates rose on the unofficial market and the country's exports were forecast to fall 6.4 percent this year to US$58.6 billion. On the unofficial market, the dollar rose to 18,390/18,430 dong on Monday from 18,370/18,390 last Friday. Commercial banks lent businesses about VND398 trillion ($22.3 billion), equivalent to 81 percent of the government’s loan-subsidy program, as of August 27, according to a statement on the government’s website. Last week the value of subsidized loans rose 0.43 percent from a week before, accelerating from 0.25 percent the previous week, central bank data shows. Governor Giau told a seminar last week the central bank would maintain its looser monetary stance, with the annual credit growth target lifted to 30 percent from the 25-27 percent set earlier by the government. Money supply would be targeted to expand 30 percent in 2009, accelerating from 20 percent growth last year, Giau said in a statement seen on Monday. “Inflation is on a rising trend in the last months of the year due to the impact of the easier fiscal and monetary policy,” he said, forecasting inflation this year at 6 percent to 8 percent. Consumer prices surged 22.9 percent in 2008. The central bank said state-run banks raised their dong deposit rates slightly, offering to pay 8.2-8.4 percent on six-month deposits against 8.0-8.4 percent a week ago, but that was below the 8.5-8.9 percent offered by partly private banks. Last week bankers said commercial banks extended their campaign to raise dong funds by increasing interest rates and in one case offering gold prizes. Source: Thanh Nien, Reuters

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Vietnam’s largest banks will lower their interest rates on dollar deposits to 1.5 percent in June from around 2 percent now in a move to help avoid dollar hoarding in domestic markets, the central bank said.

All state-run banks plus Vietcombank, Vietnam’s largest partly private lender, have also agreed to set the ceiling for dollar lending rates at 3 percent, the State Bank of Vietnam said in a statement seen on Saturday. “The governor of the SBV is asking Vietnam Banks Association to seek consensus with other commercial banks to lower interest rates and (help) stabilize the forex market,” it said. The new rates come into effect tomorrow. The interbank 12-month dollar lending rates rose to 2.29 percent on Friday from 2.20 percent a week ago. This is still below the rate of 2.45 percent on April 29, according to Reuters data. The central bank said its inspectors will also step up large-scale checks from next month to deal with corporate dollar hoarding, which has pushed the exchange rate beyond regulated levels and led to a dollar shortage for the past several months. The Dow Jones newswire quoted Hanoi-based bankers as saying the SVB is implementing measures to make dollar holders sell greenbacks to banks, and encourage enterprises to borrow dollars instead of buying them. Earlier this month the government asked authorities, including the police, to help regulate foreign exchange transactions as part of efforts to reduce dollarization in the economy and control dollar rates on the black market. The central bank will accept the country’s recently issued dollar-denominated bonds as collateral in its dollar lending operations to help ease the tightness in dollar supply, bankers said on Friday. The central bank said it would accept foreign currency denominated “valuable papers” as collateral for the first time, without elaborating. Bankers said these papers would primarily include Vietnam’s US$230 million dollar bonds issued in March and they would be accepted in the central bank’s dollar lending operations. “This will accommodate the supply of short-term funds to banks which suffer from liquidity shortfall,” the bank said in a statement seen on Friday. Importers have been complaining they were unable to buy dollars at the official exchange rate due to dollar shortage at the banks. “The new rule would create a new mechanism for the central bank to intervene to solve the dollar shortage issue but given the amount of domestic dollar bonds, it will not be much,” a banker in Ho Chi Minh City said. The central bank said earlier this month that banks had plenty of dollars that they can lend but a shortage of dollars to sell as exporters preferred to keep their export earnings in the greenback on fear of a faster depreciation of the dong. Vietnam devalued its dong currency twice last year and the currency remains under pressure because of general economic uncertainty, an expected turnaround in the trade balance to a deficit and the fact that the dong has weakened less than many of its peers recently. The government estimated earlier this week that the trade deficit in May would widen to $1.5 billion from $1.18 billion in April. But State Bank Governor Nguyen Van Giau said last week he saw no need to adjust the dong’s exchange rate against the dollar on the grounds that the dollar was depreciating against other major currencies. The central bank allows interbank dollar/dong transactions to trade up to 5 percent on either side of the official reference rate. It set the rate at VND16,938 per dollar on Saturday. Source: Reuters, Thanh Nien

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