Strong króna has been a surprise

"When you look at the figures on trade in goods, investment, foreign trade and more, I am surprised at how strong the króna has remained in recent months," says economist Konráð S. Guðjónsson. The real exchange rate index of the Icelandic króna, as measured by the price level, i.e. when the exchange rate has been adjusted for price changes, has risen sharply in the recent past and is now approaching similar levels as in the upturn in the tourism industry in the years before the pandemic. According to preliminary figures from the Central Bank of Iceland, the real exchange rate index rose by 1.05% between February and March, to 96.3 points in March. This is the highest value since August 2018. The average of the index since 1980 is 86.25 points, and 84.16 points since the turn of the century. If we look at the real exchange rate since 1980, it has only been four times higher than now – in the periods 2017-18, 2005-07, 1987-89 and 1980-81. Economist Konráð S. Guðjónsson says it is impossible to say when the real exchange rate will adjust. "The cemeteries are full of people who predicted currency exchange rates wrongly, someone said. It is in itself easy to form an opinion on whether the exchange rate is strong or weak, looking at a few years at a time. But to schedule when the changes will happen, it's almost impossible," Konráð explains. "When we look at the figures on trade in goods, investment, foreign trade and more, I am surprised at how strong the ISK has remained in recent months. The forward position has been reduced, the current account deficit has been widening and capital flows are not necessarily recovering. At the same time, the króna has not budged – on the contrary, it has appreciated since last autumn. It is possible to lose something, such as small currency purchases from pension funds, but overall I cannot find an explanation for this at a glance." According to preliminary figures from the Central Bank of Iceland, the real exchange rate index rose by 1.05% between February and March, to 96.3 points in March. ISK has been historically stable The exchange rate appreciated almost continuously in the fourth quarter of last year, a development that could be attributed to purchases of Icelandic government bonds by foreign parties and JBT's acquisition of Marel. Arion Bank's economic forecast was published at the beginning of April. The CBI forecasts that the ISK will remain strong until the second half of this year, but then begin to weaken. There is little scope for exchange rate appreciation based on the CBI's forecast of underlying economic factors, external trade, and the real exchange rate, although capital flows and expectations can always fall temporarily with the króna. Konráð points out that the nominal exchange rate of the króna has hardly changed since Covid. "No matter what currency it is, they always fluctuate, but the króna has remained in an incredibly narrow range. In a historical context, it is amazing how stable it has been." He says that whether it is the price of the króna or something else, if a particular asset remains stable in value for a period of time, that alone creates stability and trust. "And that indicates that there won't be big fluctuations in the exchange rate, there will be a positive spiral. I think this is the main reason why the exchange rate has remained so stable. In addition, the Central Bank's foreign exchange interventions have worked well and gained credibility," Konráð adds.