Central banks across the region have been stepping up the pace of intervention in foreign exchange markets to support their currencies, resulting in a drop in FX reserves. In most countries, reserves are down by around 10% from their recent peaks, and while some of this is due to shifts in asset prices (valuation effects), policymakers have also confirmed that they have been intervening aggressively. As we have noted previously, most countries in the region still have a buffer of reserves that is well above where measures of adequacy suggest they need to be and they can continue intervening heavily for several months yet. One exception is Vietnam, where reserves are equivalent to just over three months’ worth of imports. This explains why the central bank (SBV) has recently been hiking interest rates aggressively, including by 100bp at an unscheduled meeting last week. Further rate hikes seem likely over the coming months as the SBV takes on the bulk of the work supporting the dong.
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