Overview: Comparing Burgers to Burgers

Each month The Economist publishes its famous Big Mac index, which surveys burger prices across 45 countries. Although there are competitive and structural factors which may affect the variation in sandwich prices, the index is a very good indication of currency valuations. The most recent report, which was published on July 24, confirmed that most over-valued currencies in the world were in Europe. Using the Big Mac as a reference, the most expensive currency was the Norwegian kroner—which was 117% overvalued. In dollar terms, the price of a Norwegian Big Mac was $7.77 versus $3.57 in the U.S. The Swedish krona was next on the list, with an overvaluation of 75%. The Swiss franc was third at 73%. The surprise, however, was the Brazilian real, which was ranked 7th, with an overvaluation of 34%. Indeed, it was one notch higher than the British pound, which was 27% more expensive than the dollar. The burger index confirmed the notion that Sao Paulo was now more expensive than London. The Turkish lira was ranked 10th, with an overvaluation of 23%. However, the Argentine and Colombian Big Macs were also more expensive than their North American counterparts. The Colombian peso was overvalued by 8% and the Argentine peso was 1.6% higher than the dollar.

The rest of the Latin American currencies were undervalued, but the differences were small. The Peruvian sol was undervalued by 7% and the Mexican peso was 11% cheaper. The July survey was completed when the MXN peso was 10.02. Given the recent appreciation, the MXN undervaluation will now be less. Nevertheless, the Big Mac valuation justifies the recent move in the Mexican currency. The Uruguayan peso was ranked 25th, with an undervaluation of 13%. This was very surprising because many people considered Uruguay to be overvalued compared to Argentina. However, this year’s inflationary spurt in Argentina killed the competitiveness of the ARS. More surprisingly was the Chilean peso, which was ranked 27th, with an undervaluation of 14.5%. The recent devaluation of the Chilean peso helped restore competitiveness, thus becoming the cheapest currency in Latin America.

The Big Mac survey showed that the Asian currencies, however, were the cheapest in the world—despite large increases in food prices. The Singaporean dollar was the most overvalued currency in Asia, but it was 19% below the dollar. Indeed, the most expensive currency in Asia was still cheaper than the most undervalued denomination in Latin America. Surprisingly, the Japanese yen was ranked 31st, with an undervaluation of 27%. The Russian ruble was next on the list with an undervaluation of 30%. Tokyo and Moscow may be among the most expensive cities in the world, but their currencies remain competitive. The Indonesian rupiah and Filipino peso were ranked 37th and 38th, respectfully—with a paired undervaluation of 35%. The last four currencies on the list were the Thai baht, the Chinese yuan, the Hong Kong dollar and Malaysian ringgit—with undervaluations of 48%, 49%, 52% and 53%. The extreme undervaluation of the yuan was surprising given its recent appreciation and inflationary surge.

The July Big Mac index clearly divided the major currencies into regional blocs, with the exception of Latin America—where there were wide variations in valuations. The Brazilian real was the most worrisome, given the recent deterioration of its trade and current account balances. Unfortunately, a devaluation of the Brazilian real would have dire consequences for the Colombian peso—even though the latter does not appear to be as dear. The correlation between the two currencies has been tight, and a devaluation of the real would immediately be replicated in the Colombian currency. The Argentine peso was the other surprise. Despite government efforts to maintain a weak exchange rate, the inflationary pressures generated by the imposition of price controls eroded the currency’s competitive position. Therefore, the Argentine peso may be positioned for a correction, which reduces the appeal of the locally-denominated instruments—such as the Discount bonds and GDP warrants. All in all, The Economist’s Big Mac index underscores some of the discrepancies across the global currency markets and confirms why the marketplace is in turmoil.