Big Mac Index

[Investor123]

The Big Mac Index was introduced by The Economist in September 1986 as a humorous illustration and has been published by that paper annually since then.

See Wikipedia on the details on Big Mac Index.

According to Wikipedia, the Big Mac was chosen because it is available to a common specification in many countries around the world, with local McDonald's franchisees having significant responsibility for negotiating input prices.

Basically this index measures the cost of big Mac across different countries. Trader can base on this index to measure which currency is undervalued and which currency is overvalued.

According to Big Mac Index for this year, the most undervalued currency is Chinese Yuan, it is undervalued by 49%. The 2nd most undervalued currency is Japanese Yen, it is undervalued by 28%.

The overvalued currencies are the European currencies, EUR is 55% overvalued, Swiss Franc is 65% overvalued.

So base on the Big Mac Index, the ideal FX strategy is to short EUR/JPY.

 

[Timmy]

I wish you hadn't posted this approaching lunchtime...

 

[Investor123]

Hello mate, that is a longer term view. When we trade FX, we must look at the chart for entry levels.

 

[dotocom]

read about the PPP theory, it tends to be trivial and unreliable

 

[Investor123]

read about the PPP theory, it tends to be trivial and unreliable

Tell us more, where can we get the data, and what does the data tells us now.

 

[dotocom]

sorry, i'll elaborate on my point clearly, sorry, in regards to making investment decisions, especially in the short-run, the big mac index is unreliable because of the unpredictable fluctuations in FX that occurs due to many factors (ie - it assumes the world is static and ignores important variables like technological change, etc, that may be a stronger component than price).

On top of that, it seems only to apply in the long-term, and you dont know how long that would be. I personally believe the opportunity cost for that period of time would be very high, and also the risk factor as you're uncertain whether prices will adjust according to the big mac index.

what do u guys think?

 

[Investor123]

It is reliable. It is a fact that EURJPY is coming down, and its going much lower over the next few months.

 

[dotocom]

Thats only one currency out of the other hundreds. You still can't rely on it without using several other valuations.

well, next time I buy fx, ill make sure i look at mcdonalds.com.

 

[korrupt_1]

re: China big mac only $1.82US...

Maybe they don't really have 'real' beef in it... maybe it's just the left over parts from the cow - lips, tongue, ears and ar$e.. since left over parts are not as expensive as the real meat... their big-macs are cheaper.

 

[tayser]

you know what mince is yeah? You know the mince you buy at a butcher/supermarket/market? let me tell you, it's not all prime beef.

 

[Investor123]

It is a fact that EURJPY is falling, Big Mac Index is useful.

 

[wayneL]

It is a fact that EURJPY is falling, Big Mac Index is useful.

So nothing to do with the fact that JPY is rising against everything?

pffft BREND

 

[CanOz]

re: China big mac only $1.82US...

Maybe they don't really have 'real' beef in it... maybe it's just the left over parts from the cow - lips, tongue, ears and ar$e.. since left over parts are not as expensive as the real meat... their big-macs are cheaper.

The Big Mac's here are great, they taste just like home.

Say what you want about McDonald's, but they are the most consistent customer experience on the globe.

Cheers,


CanOz

 

[Investor123]

So nothing to do with the fact that JPY is rising against everything?

pffft BREND

Hi Waynel.

Isnt that prove that Yen is undervalued..??

 

[wayneL]

Hi Waynel.

Isnt that prove that Yen is undervalued..??

It might indicate that, but doesn't prove it. Just like the Stock market or any commodity.

It may just be a short term demand for yen for non-valuation reasons.

 

[Investor123]

It might indicate that, but doesn't prove it. Just like the Stock market or any commodity.

It may just be a short term demand for yen for non-valuation reasons.

Ok, let us continue to monitor.

But I am convinced that European currencies are overvalued and Asian currencies are undervalued (esp Chinese Yuan).

 

[Investor123]

EURJPY was trading at 161.30 on 28th Aug when I post the Big Mac Index article, today (2nd Sept) EURJPY is trading at 157.58.
Big Mac Index rules!

 

[Naked shorts]

lol big mac index

I think the yen is undervalued because of Japan's low interest rate, who would want to hold cash that gets only 1% p.a.?

 

[Stotty]

lol big mac index

I think the yen is undervalued because of Japan's low interest rate, who would want to hold cash that gets only 1% p.a.?

Surely then that doesn't make it undervalued, it means it is valued correctly based on the low interest rate!

 

[seasprite]

why in hell would you want to eat McDonalds in the first place is beyond me. You could put one of their burgers in your garden shed for 3 months , go back and find it looks as fresh as the day you bought it. Not even flys will touch it.
If the index works , it must not take into account changes in healthier eating habits . Bring out a Burger King index , they taste better .