The Big Mac Index and Currency ETFs

21-Aug-2011

I like this.

By

An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Tom Aspray, Forbes,

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.

chart Click to Enlarge

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?


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