The Icelandic króna (ISK) has appreciated by more than ten percent since June 24, according to data from the Central Bank of Iceland. Kaupthing Bank’s research department says the development can be attributed to increased interest margins.
Interest margin trade involves that loans are taken in a country where interest rates are low, like in Japan, and investments made in a country where interest rates are high, like in Iceland, Fréttabladid reports.
Icelandic commercial banks have undertaken such trade for the past few years. Recently the situation of Icelandic banks in foreign markets has worsened, making interest margin trade unprofitable because the difference in interest rates was next to none.
However, according the research department of Kaupthing Bank, short-term interest rates have risen recently, re-enabling interest margin trade. But long-term interest rates have not gone up, which would be necessary to strengthen the ISK permanently.
