Central Bank shores up its FX stash

The ISK appreciation has taken place in spite of significant FX purchases in the market. This spring, the CBI announced its intention to resume regular FX purchases after a hiatus dating back to December. It bought EUR 6m per week from 12 May through 11 September, whereupon it doubled its weekly purchases to EUR 12m. On 25 September, however, the CBI jumped in with both feet, buying EUR 21m (the equivalent of ISK 2.9bn), and was a party to nearly 2/3 of that day’s interbank transactions. It was the bank’s first ad hoc intervention since September 2025. We think it likely that this purchase was prompted by isolated large transactions and the CBI’s unwillingness to allow the ISK to rise even higher.

Since resuming its FX purchase programme, the CBI has hauled in EUR 153m, the equivalent of ISK 21bn, strengthening its international reserves commensurably. This spring, when the bank rebooted its FX purchase plan, it announced that the programme would conclude in the middle of October. It will be interesting to see whether this materialises. 

Iceland’s pension funds have also been quite active in the FX market year-to-date. From the start of 2026 through end-August, the funds’ combined FX purchases were equivalent to almost ISK 76bn, according to CBI figures. This is three times the amount they bought over the same period in 2025, and their largest total purchase over the first eight months of any year since 2019. According to the CBI’s Financial Stability report, foreign assets accounted for 42% of the pension funds’ total assets at the end of July. Therefore, many of the funds still have significant latitude to buy foreign assets, as the statutory maximum is currently 54.5% per pension fund. It is stated in Financial Stability that most of them intend to increase their foreign asset share still further.

Current account deficit hardly scratches the ISK 

In addition to the purchases undertaken by the CBI and the pension funds, importers and purchasers of foreign services have bought currency in the market, and considerable amounts have been bought to cover domestic financial income payments to non-residents, cross-border wage expenses, and monetary remittances, among other things. Although this is offset by FX revenues from goods, services, and foreign assets owned by Icelandic residents, the current account deficit has been sizeable. Why, then, has the ISK has been as stable as it has been, not to mention appreciating in recent months?

The ISK’s robustness in the face of the past few years’ hefty current account deficit stems from several factors. Trade-related foreign currency flows have been quite a bit more favourable than might appear at first glance, as a large share of the CA deficit has been financed directly by non-residents. The boom in investment goods imports has actually given rise to FX sales, with the proceeds used in the local economy to buy services, pay wages, and pay public levies relating to the investments. The most salient example of this is the date centre sector, which has made a significant impact on investment and import figures in recent quarters. The same is true, albeit to a lesser degree, of infrastructure development and investment in land-based aquaculture.  

In addition, the peak tourist season seems to have generated more revenues per tourist, even though raw tourist numbers have been virtually unchanged between years. Moreover, foreign investors’ purchases of Icelandic Treasury securities at the end of the summer have probably helped buttress the ISK. 

The ISK is strong for now but will probably soften in time 

We read our ISK-related tarot cards thoroughly before publishing our new macroeconomic forecast, As is noted there, the ISK will continue to be supported by a number of factors in the near future. The CA deficit is expected to narrow, the net international investment position (NIIP) is strong, Iceland’s international reserves are sizeable, the foundations of the economy are solid, and the interest rate differential with abroad will remain fairly wide. Nevertheless, a lacklustre winter tourist season, a sharp contraction in investment-related inflows of foreign capital, or a substantial deterioration in terms of trade could cause the currency to weaken. 

Even so, the real exchange rate will probably remain historically high, unless export sectors suffer more of a setback than we expect. Because wages and prices rise faster in Iceland than in trading partner countries, the nominal exchange rate will ultimately have to give way, either slowly and steadily or with a steep correction later on. 

Our exchange rate forecast assumes a gradual depreciation further ahead rather than an abrupt correction. If this assumption holds, the ISK will depreciate bit by bit, ending the forecast period roughly 4% weaker than at the end of August 2026. This equates to an EURISK exchange rate of 148 and a USDISK exchange rate of approximately 127, based on the two currencies’ recent exchange rates. It need hardly be mentioned, though, that this forecast is highly uncertain, as exchange rate forecasts typically are.