More about the relative value of currencies. The Economist released its Big Max Index past weekend. The index looks at the relative cost of Big Mac in various countries to gauge how over- or undervalued the currencies in those places are.
“The Economist” has developed the Big Mac Index as a way to determine if currencies are overvalued or undervalued. The thought is that a McDonald’s Big Mac being pretty much the same everywhere around the world, one should expect the cost to be the same as well.
Last year the most overvalued currency right was the Norwegian Krona, with the Big Mac +121% more expensive in Oslo than in the US. Hong Kong and Malaysia have the most undervalued currencies, a Big Mac costing 52% less there than in the US.
Now look to this:
The numbers marked in red are the areas I would like to highlight. They are representative of massive currency overvaluation in Europe (+72% in Norway, +55% in Denmark, +29% in the Eurozone) and absurd levels of undervaluation in Asia (-49% in China, –52% in Hong Kong, –47% in Malaysia and –42% in the Philippines).
So what does this mean for the U.S. Dollar going forward? The U.S. currency depreciation against major free-floating developed economy currencies is over. The Euro is 50% overvalued, Sterling is 28%. There is not a lot of upside to that trade from here. On the other hand, the Asian and Middle East currency pegs are at some risk of busting wide open. The Asians and Middle East have held their currencies way too low for way too long. Inflation is rife in these countries as a result. It is only a matter of time before new pegs are found or a currency basket is used to replace the dollar peg. For China, the timing will be critical as their currency is significantly undervalued and protectionist sentiment in the U.S. is sure to mount as the slowdown takes hold.
On the whole, the U.S. Dollar should continue to be weak. But, weakness should come at the expense of Asia and the Middle East more than Europe.
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“The Economist” has developed the Big Mac Index as a way to determine if currencies are overvalued or undervalued. The thought is that a McDonald’s Big Mac being pretty much the same everywhere around the world, one should expect the cost to be the same as well.
Last year the most overvalued currency right was the Norwegian Krona, with the Big Mac +121% more expensive in Oslo than in the US. Hong Kong and Malaysia have the most undervalued currencies, a Big Mac costing 52% less there than in the US.
Now look to this:
The numbers marked in red are the areas I would like to highlight. They are representative of massive currency overvaluation in Europe (+72% in Norway, +55% in Denmark, +29% in the Eurozone) and absurd levels of undervaluation in Asia (-49% in China, –52% in Hong Kong, –47% in Malaysia and –42% in the Philippines).
So what does this mean for the U.S. Dollar going forward? The U.S. currency depreciation against major free-floating developed economy currencies is over. The Euro is 50% overvalued, Sterling is 28%. There is not a lot of upside to that trade from here. On the other hand, the Asian and Middle East currency pegs are at some risk of busting wide open. The Asians and Middle East have held their currencies way too low for way too long. Inflation is rife in these countries as a result. It is only a matter of time before new pegs are found or a currency basket is used to replace the dollar peg. For China, the timing will be critical as their currency is significantly undervalued and protectionist sentiment in the U.S. is sure to mount as the slowdown takes hold.
On the whole, the U.S. Dollar should continue to be weak. But, weakness should come at the expense of Asia and the Middle East more than Europe.
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