A hamburger can help assess currency values relative to the U.S. dollar.
The Economist‘s Big Mac index compares the price of the ubiquitous burger in various countries worldwide.
“The variations in [Big Mac] price give a clue as to which currencies are over- and undervalued,” says The Economist.
In the U.S., a Big Mac costs $5.28 (average price from four cities). North of the border, it costs $5.26. (All figures are in U.S. dollars, at market exchange rates as of Jan. 17, 2018.)
According to The Economist‘s index, one of the most overvalued currencies relative to the U.S. dollar is the krone, with a Big Mac in Norway costing $6.24. Other overvalued currencies are those of Switzerland and Sweden, with the cost of a Big Mac coming in at $6.76 and $6.12, respectively.
Undervalued currencies include those of Russia, South Africa, Poland, China, Japan, New Zealand, and the Euro area. For example, a Big Mac costs $2.29 in Russia and $4.84 in the Euro area (weighted average of member countries).
Loonie vs. other currencies
“Some cracks are starting to appear in the [loonie]’s performance,” say CIBC senior economists Andrew Grantham and Royce Mendes, in a weekly economics report. “While the currency is up year-to-date against the greenback, it is down more than 1% against a basket of other currencies.”
Further, they say the loonie’s performance “comes in stark contrast” to that of the Norwegian krone—another oil-driven currency.
Highlighting the Chinese yuan, Grantham and Mendes say its recent appreciation relative to the U.S. dollar has reached levels not seen since 2o15 and early 2016.
“During that period, the Chinese economy was slowing, and authorities acted to weaken the currency,” say the CIBC economists. Further, the currencies of other key trading partners were weak at the time, so the trade-weighted yuan became very strong.
This time around, if the yuan appreciates to levels seen in 2015, the trade-weighted currency would still be 5% weaker than that year’s average, say Grantham and Mendes. Thus, they expect further appreciation of the yuan relative to the U.S. dollar.
U.S. dollar to rebound after government shutdown
Though the beginning of 2018 hasn’t been kind to the U.S. dollar, “markets may have pushed the greenback weaker than fundamentals would suggest,” say Grantham and Mendes. “While we agree this year will be one in which the U.S. dollar gives up ground, part of the recent weakness could be tied to concerns about a government shutdown.”
Since 1990, the U.S. dollar fell immediately prior to and during shutdowns, but gained ground after the shutdowns were over.
“While we still believe that the greenback will depreciate further this year, the USD should put up more of a fight after an agreement is reached.”