Based on the most recent data from the CBI, its FX purchases in June exceeded the amount the regular purchase programme calls for. In all, the bank bought ISK 16bn worth of euros in the market – assuming that on the last two days of the month it did not buy euros over and above the regular purchases. The CBI’s regular purchases totalled ISK 5.2bn, as could be inferred from its press releases. More surprising was the fact that the bank intervened in the market on at least four other days in June. These extra purchases came to ISK 10.8bn, in addition to the regular purchases.

It is worth noting that the CBI’s share in total interbank foreign exchange market turnover came to nearly 50% in June, the bank’s largest share since December 2020, when the pandemic was at its peak. In ISK terms, the CBI has not bought this much currency in a single month since April 2022.

CBI steps on the gas as summer approaches

The CBI bought currency in the interbank market for a total of ISK 28bn in H1/2025, subject to the proviso above concerning the last days in June. Just over half of these purchases took place in June. As can be seen in the chart, the CBI did not go to the market until the last week in March, when it intervened twice, buying FX for a total of 3.4 b.kr. The remainder, then, just under ISK 25bn, represented FX purchases in Q2.

In addition to its main objective of shoring up the international reserves, the CBI also saw that conditions in the market were favourable for FX purchases, not least because the pension funds have twice received sizeable foreign-denominated sums: the first time because of JBT’s acquisition of Marel, settled in January 2025, and the second time because of the Treasury’s agreement with holders of the Housing Financing Fund’s HFF bonds. Total inflows into the pension funds from these two sources probably equalled around ISK 100bn. An amusing anecdote relating to all this is that according to the CBI’s May 2025 Monetary Bulletin, part of that money will be taken from the CBI’s reserves and routed through the pension funds before coming to rest again in the bank via its intervention programme.

In general, the pension funds are big buyers of FX at any given time, as they have been steadily adding to their foreign assets, both as a result of direct inflows into the funds and with the aim of bolstering the share of foreign assets in their portfolios. In 2023 and 2024, the pension funds’ net FX purchases came to ISK 83bn and ISK 84bn, respectively. This breaks down to an average of ISK 7bn per month over the two-year period.

In the first four months of 2025, however, their purchases averaged only a scant ISK 3bn per month, suggesting that the aforementioned inflows affected their FX market behaviour. The funds bought far more in May, though, or around ISK 8bn. No figures are yet available on their purchases in June.

The ISK is of a sunny disposition now, but things could cloud over this winter

Despite the CBI’s and the pension funds’ sizeable and growing combined FX purchases in the market, the ISK has been strengthening overall in 2025. By the end of June, it had appreciated by more than 5% in trade-weighted terms since the turn of the year. The appreciation varies by currency, as global foreign exchange markets are quite volatile at present. For example, the ISK has strengthened by just over 2% against the euro (and the Danish krone) during this period, but by nearly 6% against the pound sterling and more than 15% against the US dollar.

This appreciation is even more interesting in view of Iceland’s wide current account deficit early this year. The deficit totalled almost ISK 60bn in Q1, and available goods trade figures and indicators of developments in services trade suggest a hefty deficit in Q2 as well.

There are several plausible explanations for this behaviour by the ISK:

• To a large degree, the current account deficit year-to-date is financed abroad, either directly or indirectly, and therefore does not require FX purchases in the market.
• In comparison with recent years, the commercial banks’ forward FX position was modest at the start of the peak tourist season. Therefore, this year’s peak season FX revenues are still unsold to a large extent, and are more likely to push the exchange rate higher as they are converted into ISK for payment of wages and other expenses.
• Presumably, there have been sizeable inflows for investments in Iceland, both equities and interest-bearing assets such as Treasury bonds.

The appreciation in H1 would probably have been far greater if the CBI had not intervened in the market as much as it has. Although some may ponder whether the CBI should instead have allowed the ISK to strengthen more, and work towards lowering inflation, we think such a decision would have ended up providing only temporary shelter. There are signs that the high real exchange rate is a growing challenge for exporters, and there is considerable uncertainty about how key export sectors – tourism and fishing, for instance – will fare next winter. As we note in our macroeconomic forecast from May, we expect the ISK to weaken somewhat over time. If it were to appreciate sharply in the months to come, this would exacerbate the risk of an even steeper and more painful depreciation later on.