Evaluating Potential Lowest Currency Value through the Big Mac Index. The Big Mac Index, created by The Economist in 1986, serves as a light-hearted guide to understanding whether currencies are undervalued or overvalued. The index uses the price of a Big Mac in various countries as a benchmark to assess purchasing power parity (PPP). This article delves into the current Big Mac prices across multiple countries and compares them against the US price to determine currency valuation.
(Note this is the insider pro analysis to check the true value of a currency against the US dollar after inflation adjustment using Big Mac index) This will be part of upcoming HFT pro insights on what traders need to know! There will be nearly 60 currencies reported on but this is a sample!
Argentina: Overvalued Currency
In Argentina, the price of a Big Mac is ARS 7,300. With the actual exchange rate at 1 USD = 1,050.0001 ARS, the Big Mac's price in USD calculates to approximately $6.95. In contrast, the PPP exchange rate is 1 USD = 1,260.79 ARS. This suggests that the Argentine peso is overvalued relative to the US dollar, as the price should ideally reflect the lower cost of living.
Australia: Undervalued Currency
Australia presents a different scenario. The Big Mac costs AUD 7.75, which translates to about $4.87 at the current exchange rate of 1.59 AUD per USD. However, the PPP exchange rate suggests that the Australian dollar should be stronger, indicating that the AUD is undervalued compared to the USD.
Brazil: Undervalued Currency
In Brazil, a Big Mac costs BRL 23.90. The current exchange rate places the price at around $4.03, while the PPP exchange rate suggests a more favorable valuation of BRL 4.13 per USD. This implies that the Brazilian real is also undervalued.
Britain: Undervalued Currency
The United Kingdom shows a Big Mac priced at GBP 4.59. At an exchange rate of 0.80 GBP per USD, this equates to approximately $5.73. With a PPP exchange rate of 0.79 GBP per USD, it appears that the British pound is undervalued.
Canada: Undervalued Currency
In Canada, the Big Mac price is CAD 7.81. At the exchange rate of 1.44 CAD per USD, this results in a price of approximately $5.43. The PPP exchange rate indicates a stronger valuation, revealing that the Canadian dollar is undervalued compared to the US dollar.
Chile: Undervalued Currency
Chile's Big Mac costs CLP 4,490. The current exchange rate gives a price of about $4.55, while the PPP exchange rate suggests a value closer to 775.47 CLP per USD. This indicates that the Chilean peso is undervalued.
China: Undervalued Currency
In China, a Big Mac can be purchased for CNY 25.50. The actual exchange rate converts this to around $3.52, while the PPP exchange rate indicates a more favorable valuation of CNY 4.40 per USD. Hence, the Chinese yuan is undervalued.
Czech Republic: Undervalued Currency
The Czech Republic has a Big Mac priced at CZK 109. At an exchange rate of 23.89 CZK per USD, this translates to $4.56, while the PPP exchange rate suggests a valuation of CZK 18.83 per USD. This points to an undervalued Czech koruna.
Denmark: Undervalued Currency
Denmark's Big Mac costs DKK 39.00. The exchange rate indicates a price of $5.49, while the PPP exchange rate suggests a more appropriate valuation of DKK 6.74 per USD. Thus, the Danish krone appears undervalued.
Euro Area: Overvalued Currency
In the Euro area, the price of a Big Mac is EUR 5.67. With the current exchange rate at 0.95 EUR per USD, this results in a price of approximately $5.95. The PPP exchange rate indicates a slightly lower valuation, suggesting that the euro is overvalued.
Hong Kong: Undervalued Currency
In Hong Kong, a Big Mac costs HKD 24. The actual exchange rate provides a price of about $3.08, while the PPP exchange rate implies a stronger valuation of HKD 4.15 per USD. Consequently, the Hong Kong dollar is undervalued.
Hungary: Undervalued Currency
Hungary's Big Mac is priced at HUF 1,420. The exchange rate translates this to around $3.65, while the PPP exchange rate points to a valuation of HUF 245.25 per USD. Thus, the Hungarian forint appears undervalued.
Indonesia: Undervalued Currency
In Indonesia, a Big Mac costs IDR 41,000. The current exchange rate translates this to $2.54. However, the PPP exchange rate suggests a more favorable valuation of IDR 7,081.17 per USD, indicating an undervalued Indonesian rupiah.
Israel: Undervalued Currency
In Israel, the Big Mac price is ILS 17.00. This converts to approximately $4.71 at the current exchange rate. The PPP exchange rate of 2.94 ILS per USD shows that the Israeli shekel is undervalued.
Japan: Undervalued Currency
In Japan, the Big Mac costs JPY 480. The exchange rate provides a price of about $3.11, while the PPP exchange rate indicates a more favorable valuation of JPY 82.90 per USD. Therefore, the Japanese yen appears undervalued.
Conclusion
The Big Mac Index serves as an accessible way to analyze currency values around the globe. The findings indicate that many currencies, including the Australian dollar, Brazilian real, and British pound, are undervalued against the US dollar. On the other hand, currencies like the Argentine peso and the euro appear overvalued. This analysis reinforces the significance of purchasing power parity as a tool for understanding economic conditions and currency valuation.
As global economic dynamics continue to evolve, the Big Mac Index provides a snapshot of how far currencies deviate from their expected values, offering insights into broader economic trends and potential investment opportunities.
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