IT IS usually considered quaint (charmingly old fashioned) to predict foreign-exchange movements by reference to whether currencies are dear or cheap. Metrics such as The Economist’s Big Mac index,a lighthearted guide to exchange rates, trace at how far currency values are out of whack. But they are often driven further out of kilter by capital flows, or by fear and greed,by the interventions of policymakers, and so on.
Since our final look at the index in July, or cheap currencies contain narrowed the valuation gap against the dollar—almost totally in case of the Canadian dollar (see chart). Fundamentals,such as objective value, seem (at final) to contain greater sway in the foreign-exchange market.[//cdn.static-economist.com/sites/default/files/images/print-edition/20180120_FNC577_0.png]The index is based on the idea of purchasing-power parity, or which says exchange rates should jog towards the level that would make the price of a basket of goods the same in different countries. Our basket contains only one item,but it is found in around 120 countries: a Big Mac hamburger. whether the local cost of...
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Source: economist.com