HSBC describes Vietnam’s economy as expanding rapidly, though it points to mounting external and price pressures. Growth eased from 8% last year but still ran at 7.8% year-on-year in 1Q26, while exports rose by almost 20% year-on-year on a year-to-date average, driven by electronics. Imports, however, climbed 30% year-on-year on the same basis, reflecting the import-intensive nature of manufacturing and contributing to a weaker trade position.
Since December 2025, the country has recorded a trade deficit each month, which widened to a record USD 5.2bn in May, narrowing the current account cushion. Inflation rose to 5.6% in May, exceeding the State Bank of Vietnam’s 4.5% ceiling for a third consecutive month, with higher petrol prices and rising food costs cited as drivers. HSBC reduced its external surplus forecast and lifted its 2026 inflation projection.
Monetary Policy Outlook and Currency Implications
With inflation hitting 5.6% in May, well above the 4.5% ceiling for the third straight month, we expect the State Bank of Vietnam (SBV) will be forced to act. The main drivers are not just oil, but also rising food prices, suggesting price pressures are becoming more widespread. This makes a monetary policy response, likely an interest rate hike, almost inevitable in the coming weeks.
The combination of persistent inflation and a widening trade deficit, which reached a record USD 5.2 billion in May, puts significant pressure on the Vietnamese Dong. We see a clear opportunity to take a bullish position on the USD/VND exchange rate using non-deliverable forwards. Historically, a weakening trade balance combined with rising inflation often precedes a currency depreciation, even in high-growth economies.
Implications for Interest Rates, Derivatives, and Equities
Given the likelihood of the SBV tightening its policy, we anticipate an increase in short-term interest rates. According to the latest data from the General Statistics Office, manufacturing PMI for May 2026 remained expansionary at 51.2, but input cost inflation accelerated, reinforcing the case for a rate hike. Derivative traders should consider positioning for this through interest rate swaps to capitalize on the expected policy shift.
While strong GDP growth of 7.8% would normally be bullish for equities, the prospect of higher borrowing costs creates a major headwind for the VN-Index. Global risk sentiment has also become more fragile, with the VIX index ticking up 5% in the last two weeks on concerns about persistent global inflation. Therefore, we would use options to hedge any existing long equity positions or to trade the anticipated rise in market volatility.
