The latest findings from The Economist's Big Mac index:
- Most overvalued is the Swiss franc
- Most undervalued is the Russian rouble
Full article is here, may be gated
OK ... its not really my favourite pricing model ... but it's the tastiest!
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The index is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same in different countries. Our basket contains just one item: a Big Mac hamburger. If the local cost of a Big Mac converted into dollars is above $4.79 (its price in America), a currency is dear; if it is below the benchmark, it is cheap.
- Purchasing-power parity holds only in the long run
- Over shorter periods, currencies are often pushed far away from such fair-value yardsticks by international capital flows, which in turn are driven by broader trends in the global economy
- Exchange rates are currently being buffeted by the euro crisis, the growing likelihood of a rise in interest rates in America, China's slowing economy and the sharp drop in the oil price
