Forex engine Burning Out

The lubricant for forex engine operations is set to be burn out with a State Bank move possibly taking away decent market liquidity.
Last week, with the two documents 1819 and 1820/NHNN-QLNH, the State Bank effectively banned forex option services from March 23 and said it would accelerate inspections on banks’ use of other derivatives to buy or sell dollars at rates higher than the exchange rate limit.

A Vietcombank source said the supply of dollars for the banking system had dried up recently. “This shortage is not reflecting the real situation of the market. Exporters have lots of dollars but they don’t want to sell at the exchange rate limit. This means the exchange rate is proving ineffective in providing liquidity,” said the source.

In Vietnam, banks are allowed to trade the dollar 3 per cent either side of the daily-fixed official exchange rate known as the interbank rate. “Over the last few weeks, greenback buying from corporates has risen and local banks had no way other than offering better rates to get the dollar from exporters via derivatives tools such as options,” the Vietcombank representative added.

Currency options contracts give the right, not the obligation, to buy or sell a specific quantity of one foreign currency in exchange for another at a fixed price. The buyer of a currency option then pays a premium to the seller. According to an Indochina Capital financial expert, the market was running on a dollar shortage and commercial banks had to find ways to source dollars, this means greenback that the State Bank pumped out was not enough.