There's a simple way to look at exchange rates. Its called the Big Mac PPP (or Purchasing Power parity).
Purchase power parity (PPP) is the theory that currencies adjust according to changes in their purchasing power. With the Big Mac PPP, purchasing power is reflected by the price of a McDonald's Big Mac in a particular country. This measure gives an impression of how overvalued or undervalued a currency is. So, where do we get the data? It comes from a survey recently undertaken by The Economist. This survey determines what a country's exchange rate would have to be for a Big Mac in that country to cost the same as it does in the United States.
Investopedia Says...The calculation of the Big Mac PPP-adjusted exchange rate looks at the price of a Big Mac in a given country and divides it by the price of a U.S. Big Mac. Let's say that we are looking at the Big Mac in China. If a Chinese Big Mac is 10.41 renminbi (RMB) and the U.S. price is $2.90, then - according to PPP - the exchange rate should be 3.59 RMB for US$1. However, if the RMB was actually trading in the currency market at 8.27 RMB for US$1, the Big Mac PPP would suggest that the RMB is undervalued.
The driving factor for the difference is the country's interest rate. As interest rate goes down so will its currency, all else being equal. As the interest rate rises so will the value of its currency, again all else being equal.
The Fed's current focus is recession, not inflation. As such, the Fed is willing to erode the value of the dollar to deter or lessen a recession. As recession fears decline, inflation will become of greater importance and cause interest rates to climb.
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Crew Capital Management Thoughts on Investment
Welcome to the Crew Capital Management Thoughts on Investment blog. At Crew Capital, investment education is key to how we work with our clients. We hope our conversation and analysis entice you to think further on your investment strategies and planning. For further discussion, please contact us at rjung@crewcapital.com
Thank you!
Robert F. Jung, CFA CPA*
*CPA inactve
Thank you!
Robert F. Jung, CFA CPA*
*CPA inactve
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Crew Capital enters into a new client relationship only after it provides and obtains certain information. In addition, Crew Capital may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Every prospective Crew Capital client is provided with a copy of Crew Capital ’s Privacy Policy, Form ADV Part II and Form ADV Part II Schedule F. Also, the USA Patriot Act, passed in response to the events of September 11, 2001, requires certain financial service providers to request specific information from clients. Accordingly, Crew Capital acts to verify a potential client's identity and makes a risk assessment of their financial and business activities. Lastly, Crew Capital will not provide any investment advice or supervision without a fully executed Investment Advisory Agreement.
As a registered investment adviser, Crew Capital is required by rule to adopt and enforce a code of ethics that establishes the standards of conduct expected of all employees and reflects our fiduciary duties. A copy of Crew Capital’s Ethics Policy will be provided to any client or prospective client upon request.
Nothing on this web site shall be construed as advice to any particular investment need or investor. All references regarding investment or portfolio returns are based on historical data. One should not assume that this performance will continue in the future as past performance or results are not an indication of future performance or results.
Certain portions of Crew Capital’s web site (i.e. books, newsletters, articles, commentaries, etc.) may contain a discussion of, and/or provide access to, Crew Capital’s (and those of other investment and non-investment professionals) positions and/or recommendations as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or substitute for, personalized advice from Crew Capital or from any other investment professional. Crew Capital is neither an attorney nor accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice.
At certain places on this site, live "links" to other Internet addresses may be accessed. Such external Internet addresses contain information created, published, maintained, and otherwise posted by institutions or organizations independent of Crew Capital. Crew Capital does not endorse, approve, certify, or control these external Internet addresses and does not guarantee or assume responsibility for the accuracy, completeness, efficacy, timeliness, or correct sequencing of information located at such addresses. Use of any information obtained from such addresses is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness. Reference therein to any specific commercial product, process, or service by trade name, trademark, service mark, manufacturer, or otherwise does not constitute or imply endorsement, recommendation, or favoring by Crew Capital.
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