Currency Evaluation

Financial Market Report- Foreign ExchangeGroup 2– Team 2

Nguyen Hoang Phuc – s3461818Lam Thanh Long - s3462085Nguyen Thi Tuyet Mai –s3480708Nguyen Xuan Truong – s3480710

FX report- Group2- Team2

Table of Contents

ContentsTable of content........................................................................................................................................... 1

EXECUTIVE SUMMARY...................................................................................................................2

I. Introduction.........................................................................................................................................2

II. Past Performance.............................................................................................................................. 2

1. AUD/VND Exchange rate........................................................................................................... 2

2. VND/JYP Exchange rate..............................................................................................................4

III. Market view......................................................................................................................................... 5

1. GDP growth rate.............................................................................................................................5

2. Inflation rate.................................................................................................................................... 7

3. Real Interest rate........................................................................................................................... 8

4. Commodities....................................................................................................................................9

5. Government Intervention.......................................................................................................10

IV. Forecast Exchange Rate...............................................................................................................11

V. Trading strategy..............................................................................................................................11

VI. Risk Anticipation............................................................................................................................ 12

VII. Conclusion......................................................................................................................................13

VIII. Reference list................................................................................................................................ 13

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EXECUTIVE SUMMARYThis report is created by the Treasury team of VietcomBank to analyze the changes in the

exchange rate of the two pairs of currency, AUD/VND and AUD/JPY. Taking into

account the factors such as Inflation Rate, Real Interest Rate, GDP Growth Rate,

Commodity Price and FDI, our team figures out that in the next 6 months, AUD will

appreciate against JPY and JPY will appreciate against VND. Thus, the forecasted

exchange rates of AUD/JPY will be 102.34 and JPY/VND will be 178.44. With that

expectation, the Treasury team has built up a trading strategy that earns about 7 million

VND in the next 6 months.

I. Introduction VietcomBank was founded and officially went into operation in 1963, as a state-owned

commercial bank. In recent years, the growth rate of VietcomBank is maintained at a

high level.

In this research report, we will analyze the exchange rate regime of two currency pair:

AUD/JPY and JPY/VND and some main factors of macro-economics which affect the

foreign exchange rate from 2013 to 2014. Next, some submission will be necessary to

predict the forecasted exchanged rates. Finally, our team will propose appropriate

strategies that can help VietcomBank to maximize the profit for the next six months,

taking into evaluation some possible risks.

II. Past Performance

1. AUD/VND Exchange rateFigure 1: Exchange rate of AUD/VND in the year 2013

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Source: Adapted from Online Converter, 2014

Figure 2: Exchange rate of AUD/VND in the year 2014

Source: Adapted from Online Converter, 2014

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Figure 1 shows the exchange rate between AUD and VND, which fluctuated

gradually during 2013. As can be seen in this graph, the exchange rate increased slightly

around 21502.59 VND for 1 AUD. However, there was a steady decline from April to the

end of 2013 to 18298.01 VND for 1 AUD, which indicates that VND has become more

appreciated against AUD over 2013. Base on figure 2, during 2014 the exchange rate has

change significantly. AUD/VND exchange rate went up considerately from nearly

18842082 VND for 1AUD in January to approximately 19932.73 VND in July. Then,

during the last four months of 2014, this rate has started do decrease significantly and end

up at roughly 17753.1 VND for 1 AUD. This shows that the value of VND was more

appreciated against AUD during this period.

2. VND/JYP Exchange rate Figure 3: Exchange rate of JPY/VND in 2013

Source: Adapted from FX exchange, 2013

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According to the two tables, JPY/VND exchange rate fluctuated considerably in 2013

and became relatively stable in 2014 around 200 VND for 1 JPY. Overall, from January

2013 to the end of 2014, we observed that the JPY/VND decreased significantly from

218 to 178 which indicates that the value of JPY become more depreciated against VND

during this period. This is predicted to decrease continuously in the near future because

of the economic crisis in Japan in 2014.

III. Market view

1. GDP growth rateFigure 4: Expected GDP Annual growth rate in the first 2 quarters of 2015

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Source: Adapted from Trading Economics, n.d

It is impossible to compare the growth rate of Vietnam with the other two, as

Vietnam is currently in the different state of development from both Australia and Japan.

Therefore, the average GDP growth rate must be taken into account (see Appendix 2).

By considering the average growth rate, it is quite transparent that both 3

countries are forecasted to growth below its average rates. However, Japan will be the

lowest one with 3.23% below its average, while that of Australia and Vietnam hold

around 0.5% and 0.53% respectively below the average.

Vietnam and Australia are growing faster than Japan.

However, it is impossible to assert that Japanese Yen will depreciate against the

other 2 currencies, as there are 2 other factors to consider –which are importing demand

and Capital inflows.

Figure 5: Expected Import and Capital inflows in the first 2 quarters of 2015

IMPORT CAPITAL INFLOWS UNIT

Forecasts 2014 Q1/15 Q2/15 2014 Q1/15 Q2/15

Australia 28,039 27,872 27,941 12,857 12.893 13,121 AUD Million

Japan 7,047 6,920 6,853 14,844 14,532 17,537 JPY Billion

Vietnam 13,961 14,128 14,419 N.A N.A N.A USD Million

Source: Reproduced from Trading Economics, 2014

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As shown in Figure 5, for Australia both the import demand and the capital

inflows maintain almost constant, meaning there will be not much change in the value of

AUD. Whereas for Japan, the decreasing import demand along with the increasing capital

inflows show that the JPY will appreciate. For Vietnam, the increasing demand for

importing goods is the sign for the devaluation of VND.

JPY will appreciate against AUD and VND

AUD will appreciate against VND.

2. Inflation rateFigure 6: Expected Inflation rate in the first 2 quarters of 2015

Forecasts Australian

Inflation Rate

Japan

Inflation Rate

Vietnam

Inflation Rate

Q1/2015 2.6% 2.5% 2.37%

Q2/2015 2.68% 1.4% 2.74%


Australia

Australia’s inflation rate is forecasted to increase in the next 6 months. According

to Figure 1, the inflation rate will rise steadily from 2.6 in the first quarter to 2.68 in the

second quarter of 2015. The reason for that is the depreciation of the Australia exchange

rate over the course of 2014 (from around 0.86 to 0.83). The lower exchange rate has

increased the import prices and therefore encouraged consumers spending more on

domestically produced goods and services. As a result, domestic producers are able to lift

up prices exerting a slight upward pressure on the inflation rate of Australia in 2015.

However, because the rise in the inflation of Australia is small, the decrease in AUD

value would also be small.

Vietnam

Like Australia, Vietnam’s inflation rate is forecasted to rise slightly in 2015.

Based on Figure 6 above, the inflation rate in Vietnam will increase from 2.37% in the

first quarter to 2.74% in the second quarter of 2015. In spite of the slight increasing,

Vietnam’s inflation rate will be at a pretty low level compared to the inflation rate in

previous years, which was around 15% to 20% (Appendix 1). This is due to the effort of

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Vietnam government to control the inflation rate and stabilize the country’s macro

economy in recent years (Reuters 2014). Therefore, it would be expected that the

inflation rate of Vietnam will continue remaining low in the first half of 2015.

Japan

In contrast, Japan is forecasted to have a deflation instead of inflation in the first

two quarters of 2015. From the above statistics, the inflation rate in Japan will fall and

reach 1.4% in the second quarter of 2015. Although Japan government aims at raising the

inflation rate to 2%, the sales tax hike associated with the sharp fall in oil prices will slow

down the process making its absolutely no chance for the government to meet its inflation

goal in 2015 (Kaneko 2014). Therefore, the value of Yen will continue to appreciate

against other currencies.

Overall, Yen is predicted to appreciate against AUD and VND

3. Real Interest rateFigure 7: Expected Real interest rate in the first 2 quarters of 2015

Forecasts Australian

Real Interest Rate

Japan

Real Interest rate

Vietnam

Real Interest Rate

Q1/2015 0.15% -2.5% 4.03%

Q2/2015 -0.13% -1.4% 3.78%


Australia

The Reserve Bank of Australia has kept a low and steady nominal interest rate of

2.5% for 12 consecutive meeting to help the recovery of the country’s economy (Han

2014). Thus, it’s expected that The RBA will continue to maintain a low nominal interest

rate in early 2015. However, the low nominal interest rate associated with the high

inflation will lead to a low real interest rate of Australia, which is expected to be 0.15%

and -0.13% in first and second quarter of 2015 respectively (Figure 7). This will make

Australia a less attractive market for foreign investors and therefore the capital inflow is

forecasted to decrease in the next 6 months. As a result, the AUD will be depreciated

against other currencies.

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Vietnam

Following the inflation falls, Vietnam government will continue to cut the interest

rate in 2015 to spur consumption and support domestic businesses (Thanh Nien News

2014). The real interest rate in Vietnam is expected to fall to 3.78% in the second quarter

of 2015. However, despite the cutting rate, the forecasted real interest rate in Vietnam in

2015 is still much higher than in Australia and Japan. Therefore, there will be more

capital inflow into Vietnam market leading to an appreciation of VND against other

currencies in 2015.

Japan

The Bank of Japan is aiming to increase the interest rate in 2015 since the zero

interest-rate policy has been proven ineffective in boosting the Japan’s economic growth

in the past 6 years (Oi, 2012). However, it’s very difficult for BOJ to raise up the interest

rate in short-term because cutting the money supply now will only damage the Japan’s

economy further. Therefore, economists forecast that nominal interest rate of Japan will

still remain at zero rate for the first two quarters of 2015 and leading to a negative real

interest rate of -2.5% in Q1 and -1.4% in Q2. As a result, the low real interest rate will

reduce the capital inflow making JPY depreciated against others currencies.

Overall, VND is forecasted to appreciate against JPY and AUD

4. CommoditiesOil

Figure 8: Expected Oil price in 2015

Forecast

s 2014 2015 Unit

Crude oil 93.82 62.75 US Dollar per barrel

Gasoline 3.37 2.26 US Dollar per barrel

Source: U.S. Energy Information Administration, 2014

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As shown in Figure 8, the world will witness a downward trend of oil price during

2015. The price of crude oil suffers massive reduction of 31.07 US Dollar per barrel,

while gasoline will only decrease 1.11 US Dollar in its value.

On the one hand, as the major export product (see Appendix 3), this great fall in

crude oil price will somehow hurt the value of VND as cheaper price means less demand

for VND currency to buy this product from Vietnam, making the VND depreciate. On the

other hand, as the major import product, the fall in gasoline price will positively impact

the exchange rate of VND because there will be less VND exchanged into US Dollar to

purchase this commodity. However, the reduction in the price of exporting products is

much higher than the importing, the value of VND will most likely depreciate.

Different from Vietnam, the massive plummet of crude oil price has almost no

impact to both Japan and Australia exchange rate. Still, gasoline is their major import

product. The decline in gasoline price will have the same impact to both Japanese and

Australian as discussed above. The value of Japan Yen and Australia Dollar will

therefore appreciate.

VND depreciates while both JPY and AUD appreciate. Therefore, both JPY

and AUD will appreciate against VND

5. Government InterventionVietnam:

In 2013, the State Bank of Vietnam (SBV) kept the exchange rate fluctuation range

within 2% or 3% during the year and flexibly combined policies management for

exchange rate with trading activities. Thanks to these efforts , the SBV could maintain

stability of foreign currency market as buying foreign currency to increase foreign

currency reserves (Anh 2013)

Australia:

The Australia’s Central Bank kept the the interest rate at 2.5% since August 2013 in order

to stablilize the interest rate over time and improve the economic growth. The Reserve

Bank of Australia ( RBA) stated that the balanced growth in he economy is more likely to

be achieved by the lower exchange rate and the Australia dollar is remained above is

fundamental value ( Central Bank News 2014)

Japan:

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According to Otsuma(2010), The value of Yen in exports as a stronger exchange rate

making exports less competitive. Both Bank of Japan and the Finance Ministry has taken

actions on currency market such as in April 2012, BOJ raised the scale of asset-purchase

programed by ¥5 trillion ($62 billion) and widened the maturity limit of government

bonds which would buy from 2 to 3 years. That improved the value of Yen which had

been significantly weakened in February.

IV. Forecast Exchange RateAfter analyzing the factors that could affect the exchange rate of AUD/JPY and

JPY/VND, our team forecasts that AUD/JPY will increase by 5,2% and JPY/VND will

increase 0.46% in the next 6 months.

Month AUD/JPY

December 2014 (Actual) 97.20

May 2015 102.34

Month JPY/VND


May 2015 178.44

Month AUD/VND


May 2015 18262.1

V. Trading strategyAs the treasury team of Vietcombank, we are holding 100 million VND in our

capital. Based on the forecast exchange rates, our team is devising speculative strategies

to make profit from 100 million VND.

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Speculation:

15st December:

Sell 100 million VND and buy JPY at JPY/VND = 177.62

100,000,000 VND / 0.92 = 563,000 JPY

Sell 563,000 JPY and buy AUD at AUD/JPY = 97.2

563,000 JPY / 97.2 = 5,792.18 AUD

Deposit 5,792 AUD in HSBC for 6 months at the interest rate of 2.22% p.a

(HSBC 2014).

15st May:

Principal and interest amount at 15st May 2014:

5,792.18 AUD x (1 + 0.0222 x 1/2) = 5,856.47 AUD

Sell AUD and buy JPY at AUD/JPY = 102.34

5,856.47 AUD x 102.34 = 599,351.46 JPY

Sell JPY and buy VND at JPY/VND = 178.44

599,351.46 JPY x 178.44 = 106,948,275.8 VND

Vietcombank will make profit of: 106,948,275.8 VND – 100,000,000 VND =

6,948,275.786 VND

VI. Risk AnticipationIn this report, aside from analyzing the market situation and making appropriate

strategies for VietcomBank to make profit, it is also needed to take into consideration the

possible risk that may arise and impact the exchange market, and may therefore affect the

profit of VietcomBank.

The first and most common risk is the macroeconomics factors - such as natural

disasters, government monetary policy or other political instabilities, which strongly

influence the exchange rate. For instance, the Tsunami in Japan in 2011 has severely

impacted the country economy, and thus caused the foreign exchange rate of Japan to

devaluate seriously.

Another risk VietcomBank must also be aware of is the liquidity risk. In this case,

VietcomBank will hold AUD for the next six months due to the prediction that AUD will

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appreciate against the other 2 currencies; meaning in the next 2 quarters VietcomBank

may suffer the lack of AUD to perform quick trade or any transactions.

VII. ConclusionFrom the past two years (2013-2014), the several factors such as GDP, Inflation ,

Interest rate and government intervention have influenced on the exchange rate which

causes the value of VND has been appreciated against AUD and the value of JPP became

depreciate against VND. Moreover, we forecast that the value of AUD appreciates

against JPY and JPY appreciates against VND. Therefore, we will use speculative

strategy in order to maximize profit in next 6 months.

VIII. Reference list Anh,V 2013, “Positive effects of stable foreign exchange rates” , Vietnam Economic

News, 31 October, viewed 10 December 2014, http://www.ven.org.vn/positive-

effects-of-stable-foreign-exchange-rates_t221c175n28199.aspx

Central Bank News 2014, “Australia holds rate, still sees period of stable rates”,

Central Bank News, viewed 10 December

2014,http://www.centralbanknews.info/2014/12/australia-holds-rate-still-sees-

period.html

Han, M 2014, ‘Rates are on hold - but for how much longer?’, The Sydney Morning

Herald, 3 September, viewed 7 December 2014,

http://www.smh.com.au/business/the-economy/rates-are-on-hold--but-for-how-much-

longer-20140904-10butu.html

Kaneko, K 2014, ‘Japan's economy floundering, BOJ to widely miss inflation goal:

poll’, Reuters, 24 October, viewed 6 December 2014,

http://www.reuters.com/article/2014/10/24/us-economy-poll-japan-

idUSKCN0ID0I220141024

Oi, M 2012, ‘Lesson from Japan: Do low interest rates boost growth?’, BBC News,

17 September, viewed 8 December 2014, http://www.bbc.com/news/business-

19559191

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http://www.bbc.com/news/business-19559191

http://www.bbc.com/news/business-19559191

http://www.reuters.com/article/2014/10/24/us-economy-poll-japan-idUSKCN0ID0I220141024

http://www.reuters.com/article/2014/10/24/us-economy-poll-japan-idUSKCN0ID0I220141024

http://www.smh.com.au/business/the-economy/rates-are-on-hold--but-for-how-much-longer-20140904-10butu.html

http://www.smh.com.au/business/the-economy/rates-are-on-hold--but-for-how-much-longer-20140904-10butu.html

http://www.centralbanknews.info/2014/12/australia-holds-rate-still-sees-period.html

http://www.centralbanknews.info/2014/12/australia-holds-rate-still-sees-period.html

http://www.ven.org.vn/positive-effects-of-stable-foreign-exchange-rates_t221c175n28199.aspx

http://www.ven.org.vn/positive-effects-of-stable-foreign-exchange-rates_t221c175n28199.aspx


Online Currency Converter 2013, “AUD/VND (Australian dollar/Vietnamese đồng)

year 2013 exchange rate history”, Online Currency Converter,

http://www.freecurrencyrates.com/exchange-rate-history/AUD-VND/2013

Online Currency Converter 2014, “AUD/VND (Australian dollar/Vietnamese đồng)

year 2014 exchange rate history”, Online Currency Converter, viewed 10 December

2014, http://www.freecurrencyrates.com/exchange-rate-history/AUD-VND/2014

Otsuma, M 2010, “BOJ Keeps Credit Program Unchanged, Says It's Ready to Do More If Needed” , Bloomberg, viewed 10 December 2014, http://www.bloomberg.com/news/2010-09-07/bank-of-japan-keeps-credit-program-at-30-trillion-yen-holds-rate-at-0-1-.html

Reuters 2014 ‘UPDATE 2-Vietnam PM sees strong 2015 GDP growth, hurdles

ahead’, 20 October, viewed 6 December 2014,

http://www.reuters.com/article/2014/10/20/vietnam-economy-

idUSL3N0SF1EU20141020

Thanh Nien News 2014 ‘Vietnam may cut interest rates further to boost consumption:

HSBC’, 5 September, viewed 7 December 2014,

http://www.thanhniennews.com/business/vietnam-may-cut-interest-rates-further-to-

boost-consumption-hsbc-30710.html

The Economist 2012, “Japanese exchange-rate policyWeaken, dammit!”, The

Economist, viewed 10 December 2014, http://www.economist.com/node/21554230

US Energy Information Administration 2014, ‘Short-term Energy Outlook’, 9

December, viewed 14 December 2014, http://www.eia.gov/forecasts/steo/

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http://www.eia.gov/forecasts/steo/

http://www.economist.com/node/21554230

http://www.thanhniennews.com/business/vietnam-may-cut-interest-rates-further-to-boost-consumption-hsbc-30710.html

http://www.thanhniennews.com/business/vietnam-may-cut-interest-rates-further-to-boost-consumption-hsbc-30710.html

http://www.reuters.com/article/2014/10/20/vietnam-economy-idUSL3N0SF1EU20141020

http://www.reuters.com/article/2014/10/20/vietnam-economy-idUSL3N0SF1EU20141020

http://www.bloomberg.com/news/2010-09-07/bank-of-japan-keeps-credit-program-at-30-trillion-yen-holds-rate-at-0-1-.html

http://www.bloomberg.com/news/2010-09-07/bank-of-japan-keeps-credit-program-at-30-trillion-yen-holds-rate-at-0-1-.html




APPENDIX:Appendix 1:

Appendix 2:

Figure 4: Expected GDP Annual growth rate in the first 2 quarters of 2015

Forecasts 2014 Q1/15 Q2/15 Average Unit

Australia 3.0 3.03 2.98 3.48 Percent (%)

Japan 1.5 -1.66 -1.18 2.05 Percent (%)

Vietnam 5.57 5.28 5.96 6.49 Percent (%)

Source: Adapted from Trading Economics, n.d

Appendix 3:

Top 5 Products exported by Vietnam

Broadcasting Equipment (10%), Crude Petroleum (7.4%), Leather Footwear(4.0%), Computers (3.4%), and Coffee (3.1%)

Top 5 Products imported by Vietnam

Refined Petroleum (8.8%), Telephones (3.8%), Integrated Circuits (3.3%), Hot-Rolled Iron (2.0%), and Light Rubberized Knitted Fabric (1.7%)

Top 5 Products imported by Austria

Cars (5.1%), Crude Petroleum (4.5%), Refined Petroleum (4.2%), Petroleum Gas(3.4%), and Vehicle Parts (2.6%)

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http://atlas.media.mit.edu/profile/hs/8708/




















Top 5 Products imported by Austria

Cars (5.1%), Crude Petroleum (4.5%), Refined Petroleum (4.2%), Petroleum Gas(3.4%), and Vehicle Parts (2.6%)

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