DBS Group Holdings and Australia & New Zealand Banking Group have begun offshore trading in contracts tied to the future value of the currency, the dong. The $50 million of Vietnamese contracts that trade monthly may double in a year, Standard Chartered estimates.
More than $1 billion of Chinese yuan forwards change hands daily in an overseas market that did not exist 15 years ago, HSBC Holdings said.
Vietnamese Prime Minister Nguyen Tan Dung loosened currency controls this year and announced plans to increase sales of state-owned assets. The new currency market gives investors more opportunities to bet on an economy that expanded at a 7.7% annual rate in the first quarter and may grow 8.3% this year, according to the Asian Development Bank.
"You can't imagine the amount of money going into Vietnam," said Peter Soh, head of foreign exchange in Singapore at DBS, Southeast Asia's biggest bank. "Everyone thinks Vietnam will follow China's path. The dong must strengthen."
Vietnam's benchmark stock index is up 29% so far in 2007, after gaining 145% in 2006, the world's best performance. The economy is the fastest among the six biggest in Southeast Asia.
Investors need derivatives to trade the currency because the government only allows them to buy dong for specific purposes, such as investing in stocks or building factories. The contracts are settled in dollars.
"It's very positive," and is in line with government goals of having the currency trade overseas, State Bank of Vietnam's deputy governor, Phung Khac Ke, said in an interview in Hanoi. "It shows international investors are more and more interested in Vietnam."
The central bank's support coincides with Dung's plans to open the economy.
Dung, 57, became prime minister in June and last week approved a $1 billion sale of government bonds, the largest ever. The Communist Party this year told three of the four biggest state banks to prepare for initial public offerings.
Vietnam this year ended a decade-long policy of "managed devaluation" that caused the dong to weaken 30%. The currency gained 0.7% between Nov. 22 and Feb. 21. It has since fallen 0.4% to 16,041.05 per dollar as regulators curbed borrowing for stock market investment.
Three-month, nondeliverable forward contracts trade at 16,111 to the dollar, data compiled by Bloomberg found. The prices take into account higher interest rates in Vietnam as well as the expectations among traders for dong movements.
The central bank will "keep the dong stable, in a flexible manner, so that it can help our exports," Ke said.
Traders may be "turned off" by the central bank's support for gradual depreciation, said Sean Callow, a senior currency strategist in Singapore at the Sydney-based Westpac Banking. State controls may limit swings in the currency and opportunities to profit, he said.
Investors are still "testing the water" in Vietnam, said Amy Auster, head of international economics at the Melbourne-based ANZ Bank, which owns stakes in two Vietnamese banks.
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
Trading in the futures may increase once banks introduce a standardized contract for the dong by early June, DBS said in an e-mail. Between 15 and 20 banks in Singapore and five brokers may be interested in the market, DBS said. The central bank doubled the daily limit on dong moves against the dollar to 0.5% this year.
"Vietnam is the next market in Asia to look at," said Greg Clinton, global head of interest rate derivatives in Singapore at Standard Chartered, a London-based bank that makes two-thirds of its profit in Asia. "It's booming but it has currency restrictions, and that gives rise to a nondeliverable market."
Forwards are agreements to buy assets at a later specified date. A nondeliverable forward is typically settled in dollars and involves no physical exchange of other currencies.
Source: Thanh Nien
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