If you have to travel outside their country and want to dine in the cafe McDonalds, but you pay for the Big Mac - more or less? Well, it depends on the circumstances ... However, the difference will certainly be. This difference is mainly dependent on the value of local currency against the currency of your country. For example, a Big Mac in the United States would cost the buyer to 3.50 dollars. If you go to Germany, then pay for a sandwich around 3.42 euros. Thus, if the current rate of exchange in Germany, a sandwich will cost 4.82 dollars, which is 37% more expensive than in America. What conclusion can be drawn from this analysis of the current value of the euro? The conclusion is that the euro is overvalued. However, there are other factors which should be taken into account when comparing the cost of Big Mack in different countries: the cost of labor, the cost of your purchase / rental of real estate, cost of transportation, trade costs, the assessment of product quality and other variables that are important for doing business in different countries. The practical result: the contents of McDonalds cafe in the city Omaha (Nebraska, USA) and Moscow will be different. Nevertheless, the analysis is fast and useful ... From a scientific point of view, the parity of the purchase price (or purchasing power parity (PPP)) is a measure of the value of identical baskets of goods and services. This statistic is the Organization for Economic Cooperation and Development (OECD). And Big Mac index, and OECD data represent the common tools for assessing the relative purchasing power of currencies. However, in general, the analysis of PPP is a long-term tool. It does not take into account many of the short-term influences which may lead to changes in currency values. Yet, this analysis actually suggests as a benchmark the equilibrium exchange rate, which includes a reasonable amount of assumptions and can be used for the normalization of the value of a product in different countries.
So that at the time of the PPP said the most re-world currencies?
The following chart you can see some of the most re-rate according to the Big Mac index and the OECD PPP data. The vertical axis shows how much the course of the currency is overvalued relative to the equilibrium exchange rate shown on the basis of purchasing power parity. Both indicators suggest that the Swiss franc is overvalued. Strengthening franc currency intervention has led to the National Bank of Switzerland, designed to stop the growth of the national currency against the euro and U.S. dollar. Due to the strengthening of the Swiss franc, exports to the rest of Europe, which is more than a quarter of the country's GDP, is experiencing a very difficult period. At the same time, Switzerland's economy is in a phase of deflation, as the core for the country's banking industry because of the non-credit borrowers in eastern and central Europe came the bad times. Moreover, ... the world initiative to reduce the number of people refuse to pay taxes, represents a threat to the country a model of bank secrecy. In addition to the foregoing, the Swiss franc in recent times returns a status of the traditional currency of refuge in times of crisis. All this has led to an increase in the currency of Switzerland by 10% against the euro, and about as much against the American dollar since the beginning of the global financial crisis. Nevertheless, despite the fact that in comparison with the Swiss franc Euro underestimated, relative to virtually all other currencies of course the European currency is overvalued.
Since 2002 the European currency has set historical minimums against the U.S. dollar, its value has almost doubled in the past year, reaching the highest level. Now the euro against the dollar was still at 70% above the minimum 2002. Meanwhile, the fundamentals do not support a significant strengthening. It is projected that this year's slowdown in growth the euro will be 4.8%, compared with the previous forecast of 4.1%. At the same time, it is expected that among the Big Seven is a small decrease in growth rate, namely 2.8%, will show the U.S. economy. In addition, the OECD has recently increased the forecast of world economic recovery, based on expectations that the revival of the U.S. economy will lead to positive economic growth in the world. However, regarding the forecast of OECD Europe has been more grim ... The reaction of the authorities to the crisis in the euro area was not as intense as compared with other countries, the interest rate here is still much higher than in the United States, Britain, Japan, Switzerland and Canada. In fact, among the members of the European Central Bank raised considerable disagreement about setting the lower limit of the interest rate at 1 percent. Analysis of the euro area economy has forced the OECD recommend that the ECB quickly reach the lower limit of the discount rate. Probably, the ECB has already taken steps to counter the alarming forecasts - at the beginning of this month, it was decided that $ 600 billion infusion into the European banking system to increase the flow of credit.
And what about the undervalued currency ...?
The currencies of major export-oriented Asian economies dominate the most undervalued currencies in accordance with the purchasing price parity. Among them are the Malaysian ringgit, Thai baht, South Korean won and, not surprisingly, the Chinese yuan. Even after the transition four years ago from the pegged rate controlled swimming in which the Central Bank of China adjusts the value of the yuan against a basket of currencies, national currency continues to remain heavily undervalued. As mentioned earlier, the Big Mac index and the OECD PPP are not long-term trading instruments. However, when used in conjunction with fundamental and technical analysis, as well as analysis of market sentiment, he suggested that a further assessment of future prospects. If you take into account the challenges facing the euro area, these estimates represent an additional reason to convince you that until such time as will overcome the largest in the history of the global economic slowdown, the European currency would be under pressure again.
Brian Rich
By Money and Markets
So that at the time of the PPP said the most re-world currencies?
The following chart you can see some of the most re-rate according to the Big Mac index and the OECD PPP data. The vertical axis shows how much the course of the currency is overvalued relative to the equilibrium exchange rate shown on the basis of purchasing power parity. Both indicators suggest that the Swiss franc is overvalued. Strengthening franc currency intervention has led to the National Bank of Switzerland, designed to stop the growth of the national currency against the euro and U.S. dollar. Due to the strengthening of the Swiss franc, exports to the rest of Europe, which is more than a quarter of the country's GDP, is experiencing a very difficult period. At the same time, Switzerland's economy is in a phase of deflation, as the core for the country's banking industry because of the non-credit borrowers in eastern and central Europe came the bad times. Moreover, ... the world initiative to reduce the number of people refuse to pay taxes, represents a threat to the country a model of bank secrecy. In addition to the foregoing, the Swiss franc in recent times returns a status of the traditional currency of refuge in times of crisis. All this has led to an increase in the currency of Switzerland by 10% against the euro, and about as much against the American dollar since the beginning of the global financial crisis. Nevertheless, despite the fact that in comparison with the Swiss franc Euro underestimated, relative to virtually all other currencies of course the European currency is overvalued.
Since 2002 the European currency has set historical minimums against the U.S. dollar, its value has almost doubled in the past year, reaching the highest level. Now the euro against the dollar was still at 70% above the minimum 2002. Meanwhile, the fundamentals do not support a significant strengthening. It is projected that this year's slowdown in growth the euro will be 4.8%, compared with the previous forecast of 4.1%. At the same time, it is expected that among the Big Seven is a small decrease in growth rate, namely 2.8%, will show the U.S. economy. In addition, the OECD has recently increased the forecast of world economic recovery, based on expectations that the revival of the U.S. economy will lead to positive economic growth in the world. However, regarding the forecast of OECD Europe has been more grim ... The reaction of the authorities to the crisis in the euro area was not as intense as compared with other countries, the interest rate here is still much higher than in the United States, Britain, Japan, Switzerland and Canada. In fact, among the members of the European Central Bank raised considerable disagreement about setting the lower limit of the interest rate at 1 percent. Analysis of the euro area economy has forced the OECD recommend that the ECB quickly reach the lower limit of the discount rate. Probably, the ECB has already taken steps to counter the alarming forecasts - at the beginning of this month, it was decided that $ 600 billion infusion into the European banking system to increase the flow of credit.
And what about the undervalued currency ...?
The currencies of major export-oriented Asian economies dominate the most undervalued currencies in accordance with the purchasing price parity. Among them are the Malaysian ringgit, Thai baht, South Korean won and, not surprisingly, the Chinese yuan. Even after the transition four years ago from the pegged rate controlled swimming in which the Central Bank of China adjusts the value of the yuan against a basket of currencies, national currency continues to remain heavily undervalued. As mentioned earlier, the Big Mac index and the OECD PPP are not long-term trading instruments. However, when used in conjunction with fundamental and technical analysis, as well as analysis of market sentiment, he suggested that a further assessment of future prospects. If you take into account the challenges facing the euro area, these estimates represent an additional reason to convince you that until such time as will overcome the largest in the history of the global economic slowdown, the European currency would be under pressure again.
Brian Rich
By Money and Markets
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