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Glitnir Bank today reported that the Icelandic krona (ISK) has appreciated by 9% during the past fortnight, following a slump to an historical low level in mid-June.

The krona is now at a similar level as at the beginning of June. The Nordic bank details reasons for the appreciation of the currency in a market research report, which is posted on its website.

One reason for the strong appreciation is that the interest rate differential is once more at least partly reflected in foreign exchange swap pricing, particularly the short end of the curve. Also, last week saw an unexpected issuance of an ISK eurobond, which increases somewhat the likelihood of further issuance in the autumn when a substantial amount of ISK eurobonds mature.

Furthermore, high yielders around the world have been recovering in recent days following significant depreciation earlier in the year. Lastly, expectations for further rate hikes in the Eurozone have weakened following the President of the European Central Bank’s remarks last Thursday, when he implied that the 25 bp hike in the ECB’s policy rate did not necessarily mark the start of a new rate hike process in the euro.

Short-term ISK development will to a significant degree be governed by how persistent the recent recovery in the FX swap market will prove. Also, global risk appetite will continue to be a major determinant of the ISK exchange rate in coming weeks.

For more information on the Icelandic economy and for daily market reports, visit www.glitnir.is/English/Markets/Research

Icelandic Prime Minister, Geir H. Haarde, said in a speech in London on Tuesday that the current weakness of the Icelandic krona is exaggerated. The PM believes that although some depreciation had long been expected, the currency’s current status is “lower than its equilibrium level should be”.

Speaking at a conference of international investors, Haarde emphasised that the fundamentals of the Icelandic economy remain strong and stressed his belief that the country will emerge unscathed from the global economic downturn.

The currency has faced downward pressure as the recent flow of direct foreign investment in large-scale industrial developments begins to dry up with the completion of construction projects.

The krona has been further dragged down by fears that the Central Bank would be unable to bail out Iceland’s huge banking sector in the event of a crisis. The Icelandic banks have expanded rapidly over the last decade or so and have significant foreign debts. Their combined assets are nine times the national GDP.

The government’s actions to help the currency and the property market at the end of last week are expected to help, and any foreign currency loans the government takes out will make a positive difference very quickly, according to research from Glitnir Bank.

Haarde said he believes Iceland’s trade deficit and the Central Bank base interest rate will begin falling before the end of the year – a development that would significantly aid the krona in its recovery. A new Glitnir research report echoes the PM’s sentiments on the decreasing trade deficit and interest rates.