The Big Mac Currency Index: Sell Norway, Buy India

The Economist’s Big Mac Index provides us with a glimpse at relative values in the currency markets.  Although it’s not an exact science it does help provide a fairly steady reading on a global product, McDonald’s Big Mac sandwich.  According to the latest reading the index is showing substantial overvaluation in Norway and Switzerland:

“At market exchange rates, the Canadian version of the burger costs $5.39, compared with an average price of $4.37 in America. By our reckoning, then, the Canadian dollar is roughly 24% overvalued relative to its American counterpart. In Mexico, by contrast, a Big Mac is just $2.90 at market exchange rates, suggesting the peso is 33% below its long-run value relative to the dollar. The greenback buys much more Big Mac south of the border than north of it.

The Big Mac index suggests that currencies are particularly overvalued in Norway, Switzerland and Brazil (see chart). The continuing strength of the real is a big source of irritation to Brazil’s finance minister, Guido Mantega, who first trumpeted the phrase “currency wars” in 2010. Brazil battled back by introducing capital controls in the form of taxes on foreign purchases of Brazilian securities, but the currency remains overvalued. In December Brazil notched a record current-account deficit as its exports tumbled, contributing to a slide in the economy’s growth prospects. Switzerland handled its overcooked currency by pegging its franc to the euro in 2011. That halted the Swiss franc’s appreciation against the then-beleaguered single currency, although not against the dollar.”

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. I wouldn’t pay too much attention to this index. Bear in mind that the average Norwegian McDonalds waitress over 20 years of age, get somewhere around 25$ an hour. What they earn in India, or anywhere else in the world for that matter, is probably somewhat lower :)

  2. to add to the comment above: the big mac index is much used better to gauage the purchasing power in a specific nation than the relative strength of the currency.

  3. Hey people,

    Sorry to change the subject, but is there a free place to go to see the fund flows for equities that the media often points to?

  4. The far more important currency question: why is the Euro surging vs USD? It continued to surge again today. According to this index the euro is slightly overvalued vs USD. So why has the euro gone from 1.20 up to 1.366 vs USD? That is quite a move! Do the currency traders believe that the Eurozone problems are mostly behind us, while the US problems are just beginning? The only explanation is a voracious appetite for higher yield even if it involves more risk.

    • I think this could potentially be the underlying cause, but the market doesn’t yet pay much attention to it, so odds are it isn’t the primary driver but it helps to sustain the move towards a stronger EUR. As European sovereigns try too hard to balance their budgets at the same time and this leads to a nasty recession, despite record low rates, the horse doesn’t drink, ie, private sector credit growth is very weak. All this means demand in Europe is falling hard of a cliff and that drives imports down. Now take a step back and look at exports to the EU from any major country, they’re all down 25% yoy. Exports are driven by the state of the economies elsewhere which are not in such bad shape as in Europe. Usually, a weak economy leads to a weak ccy, but that comes from weak demand leading to lower rates, but when all rates are close to zero, this effect is much weaker, so it all boils down to current account and investment flows. So all in all, Europe is swinging into a mighty current account surplus and that could push the EUR a lot higher from here, making its debt burden heavier in the process.

  5. A frivolous measure.

    The IEA has published some figures suggesting Italian oil consumption is now half of German consumption and slightly less then Spanish consumption despite having a extra 13 and a half million people !!!!

    Something very VERY major is happening in Italy……

    its economy before the 1rst Mario extraction phase was bigger then the UK
    After the second Mario extraction operation ………..

    OECD Demand based on Adjusted Preliminary Submissions – November 2012

    Germany 2.5 MBD (2.1% PA growth)
    France 1.8 MBD (3.9 % PA growth)

    Italy 1.24MBD (-11.8% PA growth)
    Spain 1.26MBD (-7.2% PA growth)

    Who got to eat those Italian & Spanish oil rations ?

    UK consumption also down massively
    UK 1.47MBD (-7.8% PA growth)

    The moving average figures differ slightly from the above figures but……..
    Who cares.

    Pure carnage in Italy me thinks

    -11.8 % !!!!!!!!

    Italy was a large economy once upon a time.

    • @Dork, So with all the discontent in Italy, will Berlusconi pull an upset victory, or come close enough to disrupt the new government? Are we heading toward an Italian crisis?

  6. Keep in mind the Maharaja Mac is made of Chicken, not Beef, because Indians do not eat Cows. Any comparison of the price has to be multiplied by the chicken/beef ratio. which as far as I can tell is about 1/3 in the grocery store. So, India’s currency is fairly valued after all.