Big Mac Index

Beginner Questions
1

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.

2

Result of the Big Mac Index.

Big Mac Index.jpg700×438 42.3 KB

3

very interesting. Ive heard the japanese yen and the chinese yaun are both severly undervalued on purpose. This is to stay competitive with regards to export pricing. If the yuan stays weak then the usd can buy more yuan worth of exports. So be careful with the short eur/jpy theory. The jpy may stay undervalued for a long time in the fundamental scheme of things.

4

Thanks, but the trend is your friend, the trend for EURJPY is still down.

5

not on the weekly, it is clearly up and maybe due to climb again if that trendline holds.

According to Big Mac Index for this year,

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

eur jpy.jpg700×329 19.9 KB