The Big Mac Index and Currency ETFs
The “Big Mac Index” suggests a new long-term trend for the Chinese yuan while the US dollar tries to bottom. These ETFs could make good alternatives to stock investing in this volatile market.
Since 1986, The Economist has published the “Big Mac Index,” which strives to determine the correct value of the major currencies based on purchasing power parity, or PPP. Its underlying principle is that a dollar should buy the same amount in all countries, and the McDonald’s Big Mac is used to represent a basket of goods.
See related: Invest with the Big Mac Index 2.0
I have always found the index quite interesting, and the latest results were released late last month. Though I doubt anyone uses the data to trade currencies or currency ETFs, year after year, there are some interesting trends.
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The Economist likes to “Estimate the current fair value of a currency (using) the “line of best fit” between Big Mac prices and GDP per person.” This is represented on the left-hand chart with the raw data on the right. The current analysis suggests that the Brazilian real is the most overvalued currency.
Looking back through the data from 2004 through 2007, the Icelandic krona was one of the most overvalued currencies. In 2007, it had its most overvalued raw-data reading of 131. The Krona peaked in July 2007 and lost over half of its value in the financial crisis.
The Chinese yuan has been undervalued for the past few years according to the Big Mac Index, but it has now improved to become fairly valued. Last week, the Peoples Central Bank of China allowed the yuan to strengthen and it moved to its highest level versus the dollar in 17 years. Is this a new trend?
Categories: Asia, Investment Wisdom, Latin America, North America, Statistics, Tools and Resources, Western Europe