Assignment 2 – FX market analysis and trading strategies

FX Market Past Behavior Analysis 1.1 USD/CNY Figure 1: USD/CNY exchange rate 2015-2018 reproduced from Thomson Reuters Eikon It can be clearly seen that the relationship between USD and

TRAN QUYNH NHU – s3715434

TRUONG QUYNH NHU - s3694814

AN THANH HANG - s3634827

Mr M Truong

Assignment 2 – FX Market Analysis and Trading Strategies

Table of Contents

Executive Summary

This report is aimed at deriving appropriate strategies to benefit from currency fluctuations in the foreign exchange market for the Vietnamese Bank Vietcombank-Joint Stock Commercial Bank for Foreign Trade This report will consist of two main parts: (1)

an analysis of foreign exchange market behaviors and related elements; (2)

recommended trading strategies In order to deliver the best advice, this report will take into consideration many elements that can directly affect the currencies such as past FX market behaviors, economic elements indirectly influencing the currency of all three nations USA, China and Vietnam i.e economic growth, relative inflation rate, relative interest rate, international speculation, foreign exchange market speculation, commodityprices and official intervention Despite careful analysis, there is currently high volatility

in the foreign exchange market as of now due to the brewing trade tensions between China and the US Thus, we will offer risk management strategies in the case of

unpredictable market changes due to any changes in world events

With an expectation that within the next 6 months, the USD will depreciate against the CNY and VND, our strategy is to sell off USD at the moment to buy CNY and VND and later on after 6 months we will try to buy back the USD to square our position Should the market follows our expectation, the planned profit will be CNY 3,771,700 and VND 802,000,000 To manage

unexpectable risk, we also recommend trade in small quantity and follow closely to the exchange rate, to have any needed action should the market go against our plan.

I Introduction

Vietcombank-Joint Stock Commercial Bank for Foreign trade of Vietnam is one ofthe biggest bank in the Vietnamese market capitalization with an estimated evaluation of85,014 billion VND (US$3.98 billion) as stated in Ho Chi Minh City Stock Exchange(CafeF.vn, 2018) JSC Bank for Foreign Trade of Vietnam, once known as Bank for Foreignexchange of Vietnam, was established on April 1st, 1963 from the Foreign ExchangeBureau (of the State Bank of Vietnam), becoming the first commercial bank decided forpilot privatization by the Government

After over 50 long periods of development and advancement, Vietcombank hascontributed essentially to the strength and development of national economy, maintainingthe part of a considerable foreign exchange bank in encouraging productive domesticeconomy and additionally impacting significantly on local and worldwide money relatednetwork

Specifically in this report, our team working for Vietcombank sets the mainobjective is to develop an strategy of trading in the foreign exchange market We chosetwo pairs of currencies which are USD/CNY and USD/VND since there have been a number

of remarkable economic events recently affecting the market We predict that USD willdepreciate against and CNY The report will include analysis of past performance of bothcurrencies and the trading strategy for 2019

II Analysis and trading strategies

1 FX Market Past Behavior Analysis 1.1 USD/CNY

Figure 1: USD/CNY exchange rate 2015-2018 (reproduced from Thomson Reuters Eikon)

It can be clearly seen that the relationship between USD and CNY was extremely unstablefrom 2015 to half of 2018 With China’s effort to modify the traditional fixed exchange rate, China-USD exchange rate was gradually increasing its value from quarter 2, 2015 then reaching a peak at 6.9330 in December when China became the US’s biggest trading partner with the trading valuation was valued at $441.6-billion (U.S.) to the end of September whichaccounted for 15.7% of total U.S trade quantity, according to the U.S Commerce Department (IAN, 2016) However in 2017, The U.S trade deficit with China set a recordsince Canada became the US no.1 foreign oil supplier with price lower than the average climb at that time which lead to a dramatically fall in exchange rate until the second quarter of 2018 (Ken, 2018)

Figure 2: USD/CNY forecast exchange rate 2015-2018 (reproduced from Thomson

1.2 USD/VND

Figure 3: USD/VND exchange rate 2015-2017 (reproduced from Thomson Reuters Eikon)

Contrast to CNY, the exchange rate of VND and USD has been increasing constantly since 2015 Even though there were some fluctuate in 2016, the USD raised its value by 22,800 in 2017 as a result when Vietnam has considered the United States as its top single-country

export partner and shipping value is approximately $46.484 billion last year (Ralph, 2018) The trading between 2 currencies rose significantly during the first 6 months of 2018 with the trading activities up to $27.44 billion according to US Census Bureau data.

Figure 4: USD/VND forecast exchange rate 2018-2019 (Retrieved from Thomson

Reuters Eikon)

However, Vietnam is forecast to reduce the trade with US due to the decision of the

US president Donald Trump to withdraw from Trans-Pacific Partnership (TPP) in whichtrade agreement will obliterate the main priority of trade relations between Vietnam and USA (Everycsrreport.com) That is the reason why the exchange rate between 2 countries is predicted to go down (purple line in the figure 4)

2 FX market element analysis 2.1 Inflation rate

2.1.1 US inflation rate

Figure 5: US inflation rate (Retrieved from Thomson Reuters Eikon)

The US inflation rate has been steadily increasing since the beginning of the year to a high

of 3% from its 1.7% since the beginning of 2018 This reflects steady economic growth in the US However, despite a tightening labour market, wages growth remain slow, not catching up to the rise in inflation The Federal Reserve recent increase interest rates is expected to counteract this rising inflation rate

Figure 6: US inflation rate forecast (Retrieved from Thomson Reuters Eikon)

The Federal Reserve recent increase interest rates is expected to counteract this rising inflation rate Hence, it is projected that the US inflation rate will slow down in the next few quarters to 2.70% and 2.50% from its current high of 3.0%

2.1.2 China Inflation rate

Figure 7: China inflation rate 2015-2017 (Adapted from Thomson Reuters Eikon)

China’s inflation has been steadily decreasing from its high at 3% since the beginning of

2018 down to 2.0% in July 2018 It is expected that it will continue steadying out to 2.20%

by the end of 2018

Figure 8: China’s inflation forecast 2018-2019 (Retrieved from Thomson Reuters Eikon)

2.1.3 Vietnamese Inflation rate

Overall, there has been a reducing trend in Vietnam’s inflation rate thanks to government effort to adjust policy On a monthly basis, consumer prices edged up 0.08 percent, following a 0.27 percent drop in March Inflation Rate in Vietnam averaged 6.44 percent from 1996 until 2018, reaching an all-time high of 28.24% in 2008 and ending up at 3.15% in 2018 However, inflation rate has been alternated frequently during the time of 2016-2018 In 2017, the Vietnamese economy achieved a double success: controlling inflation and

economic growth exceeding the target set by the National Assembly (NA) as the average CPI increased 3.53 per cent over 2016 and 2.6 per cent compared to December 2016, fulfilling the target of keeping the rate under 4 per cent for the whole year (Vietnamnet, 2018) However, inflation rate in 2018 are forecasted to be pressured as long as economicgrowth are also predicted to increase Vietnam’s inflation will be mainly pressured by change in the prices of public services and food as well as fluctuation of oil price which already rise the inflation to 3.15% in January 2018 (Nhan Dan Online, 2018).

2.2 Interest Rate

The interest rate has an important correlation with the strength of a currency as interestrates will often influence the decisions of investors Should interest rates go up, it wouldprove to be beneficial as investment would see higher returns and vice versa Thus, higherinvestment will drive up demand for the US dollar and cause it to appreciate

Figure 8: US interest rates forecast (Retrieved from Thomson Reuters Eikon)

The Federal Reserve have been steadily increasing interest rates over the past few yearsand is expected to continue increase the interest rate in the next few quarters (Reuters,2018) As can be seen above, the interest rate is currently at 2% and is expected to go up

to 2.1% and 2.4% in the last two quarters of 2018, respectively While usually, interestrates increases might boost investment, current slow wages growths coupled with lowemployment and rising inflation indicates no real benefit for investors Thus this increase

in interest rates will not have much effect on the currency strenth in the near future

Figure 9: China’s interest rate forecast (Retrieved from Thomson Reuters Eikon)

China’s government is keeping the country interest rate at a stable benchmark due to itscurrent efforts to stabilize growth It will keep its interest rates at around 4.3% all

through 2018 as well as into 2019 This rate is still quite an attractive rate as it still

remains higher than the US’s rate of 2.0% Coupled with its steady low inflation rate, China proves to be an attractive investment destination This will undoubtedly have an effect on its currency as demand for it will maintain high, causing appreciation

Figure 10: China’s interest rate forecast (Retrieved from Thomson Reuters Eikon)

As can be seen from the graph, Vietnam’s interest rate is the highest among the three countries with it currently being at 6.26% This rate indicates Vietnam current status as a fast-growing, emerging economy that is very attractive towards foreign investors In the next few quarters, it is projected that the interest rate will keep increasing to 6.30% to theend of 2018 This is a positive indication for the Vietnamese Dong as recent slopes will recover as prospects remain high and attractive towards foreign investors

2.3 Economic growth

2.3.1 US growth

The US economy has been growing steadily and hit its peak in the second quarter of 2018 with a growth rate 4.1% thanks to the short term effects of the loosening tax policies In addition, the Fed’s increase in interest rates as mentioned above signifies a steadily growing economy driven by high private consumption as well as increasing foreign

investment (OECD, 2018)

However, it is projected that the economy will slow down in the next two quarters with growth rates dropping to 2.8% and 2.6% in quarter 3 and 4 of 2018, respectively This was ushered on by the recent rising tensions in the trade war initiated by the US President where a series of tarriffs were implemented on Chinese goods, in terms causing

retaliations from China

Growth remaining steady means that the USD would remain in demand as rising interest rates will boost invesment as well as foreign demand; however, trade related concerns signify as risk that would detract foreign investors as well as impede exports due to trade relatiation caused

by the trade wars and thus would cause a depreciation to the dollar.

Figure 11: US GDP quarter % change forecast (Retrieved from Thomson Reuters Eikon)

2.3.2 Vietnam growth

Vietnam is expected to continue strong growth throughout the end of 2018 and to 2019 with predicted growth rates at 7.1% and 6.8%, respectively (Asian Development Bank, 2018) Recent rises in global trade prompted exports to rise by 21.2% (Asian DevelopmentBank, 2018) This growth is also prompted by a high increase in aggregate demand since

2017 has been ushered by strong demand from the private sector fueled by FDI as well as private consumption Stable rise in income and a steady rate of inflation is another

confirmation for investors’ confidence

Vietnam projected growth rate in 2018 (Adapted from Thomson Reuters Eikon)

Figure 12: Vietnam GDP quarter % change forecast (Retrieved from Thomson Reuters Eikon)

Recent trade tensions between China and the United States did have some minor impacts on the Vietnam economy as indicated through its currency depreciation as well as stock market plummits The affect from the trade war on Vietnam was indirect as the tarriffs on Chinese goods were the hi- tech produces and not on essential goods such as energy It was rather prompted by investors’ overreaction to the uncertainty, causing them to withdraw capital from emerging markets such as Vietnam However, it is expected to recover as trade tension eases between the two economic powerhouses In addition, as one of the strongest emerging economies in SEA with the highest and most stable growth rate (Asian Development Bank, 2019) Thus, it is expected the Vietnamese dong will recover despite

losses from the Chinese-US trade tension impact.

2.3.3 Chinese growth

As China is one of the fastest growing economy in the world, there have been recent focus on ensuring that growth is sustainable and high quality Growth rates still remain at one of the highest in the world at 6.40% in the second quarter of 2018 Because of the focus on building more sustainable growth, it is projected that growth will steadily slow down with 6.30% being the forecast for the third and fourth quarter of 2018 (Thomson Reuters)

Figure 13: China GDP quarter % change forecast (Retrieved from Thomson Reuters Eikon)

This growth is prompted by the surge in export demand as well as private consumption thanks to rising income and a stable inflation rate There have also been a focus on infrastruture investment prompting higher domestic consumption High growth rates and a re-focus on sustainable growth will be an assurance for investors’ confidence and will encourage more consumption of the Chinese Yuan

However, the recent trade war between the US and China cause major doubts among investors as we see the Chinese Yuan plummeted for consecutive weeks But recent talks

of a meeting between the two governments have eased tensions Thus, it is expected that the Yuan will recover and appreciate in the next few quarters

2.4 International speculation

International speculation play a major role in the foreign exchange market as speculative

buying make up a large section of it as well as drive investment decisions In this case,the ongoing trade war between US and China is a significant event to look to as it hasalready caused major shifts in the foreign exchange market.

Impacts of the trade war might heavily affect the currency of both China and the US as tariffs from the US might cause a deficit up to $50bn on Chinese goods This has cause the Chinese Reminbi to slope down for 8 consecutive weeks causing much concerns among foreign investors The depreciation of the Chinese Yuan has a reverse effect thanwhat the US president might have intended as it only made Chinese exports more

attractive to investors due to the low prices The rising demand for Chinese goods will cause a higher demand for Chinese Yuan causing the currency to move up in the near future Plus, the US trade deficit with China remain at an all time high, suggesting

despite recent hikes in the dollar, it will eventually depreciate against the Chinese Yuan

In addition, there have been recent efforts to negotiate between China and the US to ease tensions Thus, the Chinese Yuan should appreciate in the next few quarters

Figure 14: CNY/USD and VND/USD forecast (Retrieved from Thomson Reuters Eikon)

The effect of the trade war between the US and China had a wide ranging impacts on many of their partner countries, including Vietnam The spill-over effects from the trade tensions has cause currency in the Asian region, especially Vietnam to depreciate for many weeks due to the

uncertainty and risk-aversion behaviors from investors However, as news of talks between the governments suggest ease in trade tension, the Chinese Yuan is expected to stabilize and rise again In effect, it will pull up the Vietnamese Dong as Vietnam’s economy itself is an emerging economy with currently one of the highest growth rates in the