McManipulator

America’s Treasury Department removed the designation of currency manipulator from China five months after the moniker was given.  This seems reasonable since the two countries were in the process of negotiating the now-signed “phase one” portion of a larger trade agreement.  Pejorative monikers probably don’t make deliberations easier.

While the Treasury may need to take the high road in order to accomplish a greater cause, Atlas doesn’t.  Instead, we like to look at market forces to see if currencies are over/under valued.  More specifically, we watch the Big Mac Index from the Economist. This index compares the cost of a Big Mac across several currencies. 

Such a look at currency prices is based on the theory of purchasing power parity which suggests that currencies should adjust until a basket of goods (in this case two all-beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame seed bun) cost the same everywhere.  In short, the price should be virtually the same no matter where it is purchased after adjusting for currency exchange rates because the ingredients are identical globally.

So, where do things stand?  As it happens, a Big Mac will set you back $5.67 here at home.  However, it is just $3.12 in China.  That’s a 45 percent price difference!   Now this index can only quantify the price differences.  It is unable to provide qualitative reasoning for the disparity, although McDonald’s is known for its stringent quality-control worldwide.  Nevertheless, Atlas won’t officially call any one country a manipulator. 

Heck, we’re going to call lots of countries manipulators.  The Chilean peso is undervalued by 40 percent.  Turkey’s lira is down even more, 61 percent!  But those are two nations experiencing above-average political unrest, so lets’ look at a few currencies from more stable regions.  Japan’s yen is 37.5 percent lower than parity.  New Zealand is 24.3 percent away from even. The British pound is off 22.2 percent, while Canada’s loonie is off just 8.4 percent.  Perhaps the Duke and Duchess of Sussex should have stayed home.

America’s dollar is strong.  Just two currencies (Swiss franc and Norwegian krone) are more expensive based on purchasing power parity.  All else being equal, a strong currency is a headwind in the global economy because our goods and services cost more, and price sensitive buyers will look for cheaper alternatives.  Fortunately, we live a strong and mostly self-contained economy, so the negative impact of the currency’s strength is limited.