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ISK down?


There are signs that the ISK may weaken in the near future if the following scenario plays out:

  • Strikes: Lowers production causing shortages that drive up consumer prices.
  • Rising food prices: Causes a drop in consumption which leads to the same scenario as strikes.

The effect of the two is increased inflation which raises indexed loans. As a result, unemployment may rise reducing bank deposits. A weakening of the ISK may aid export to some extent but with less value being generated domestically the ISK is likely to weaken. While this increases the competitive advantage of export firms (which strengthens the ISK in the long-term if properly executed), investments in Icelandic non-export firms can be put on hold until the strike issue is resolved.

Counter effects:

  • EU consumers markets: Driven toward less expensive products which increases Iceland’s export potential. The greater the export, the greater the GNP and earning power of the economy which strengthens the ISK. Also, keep in mind that the strength of the ISK is relative to economic conditions elsewhere.
  • Icesave: Landsbanki may be able to settle a large portion of the Icesave debt which restores trust in the ISK to some degree.
  • Tourism: An increase in tourism (expected to reach a new record) is expected to strengthen the ISK over the summer months (unless there is a strike, which may collapse this opportunity).

Icelandic automotive and clothing importers/retailers focusing on the domestic market may be facing a period of decreased turnover with increased cost of sales. A counter-move is to target tourists and perhaps load up on stock before the ISK weakens. This is case specific; this strategy will not work for everyone.

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