The Big Mac Index And Foreign Exchange Investment

Steve Sjuggerud believes that conditions in Europe will lead to a fall in the Euro this year. One indicator that the Euro is in trouble is the Big Mac index which suggests the Euro is way overvalued. See the following post from Daily Wealth.

It's time to bet against the euro...

That's the trade I recommended over a month ago in my True Wealth newsletter. And the trade is still as good... no, better... than it was when I first recommended it.

Here's why I recommended it in the first place... and why NOW is an even better time to make the trade than when I told my paid subscribers about it in mid-December...

First, as I'm sure you've already heard, Greece is at risk of falling out of the euro. But we have many other factors telling us the euro will continue to go down...

First off, we have the trend... In currencies in particular, once a trend gets going, it's hard to derail it.

Last year's trend was a crashing dollar. In 2010, it looks like the trend will be a crashing euro. No matter how you analyze trends, you'd have to say the euro is finally in a downtrend right now... It peaked in late November and is down more than 8% already. That's a huge move for such a short time in a major currency.

When I first recommended betting against the euro in mid-December, I wasn't certain we were in a downtrend yet. Now, it's absolutely clear... the euro fell into the $1.30s yesterday for the first time since last summer.

Also, importantly, the euro is WAY overvalued relative to the dollar.

One of my favorite simple indicators of whether a currency is overpriced or underpriced is the "Big Mac Index" from The Economist magazine... As the chart here shows, whenever a Big Mac in Europe is 50% more expensive than a Big Mac in the States, the euro crashes.



We're not at the 50% overvalued point anymore (which is a real extreme). But the euro is still very expensive... A Big Mac in euros is around 35% more expensive than a U.S. Big Mac.

We will also likely have interest rates in favor of the dollar in 2010...

If the European Union must save Greece and the other "PIGS" (Portugal, Italy, Greece, and Spain), then interest rates in Europe will stay low. But the U.S. is in recovery, where rates can rise. At the very least, Europe won't have any interest-rate advantage.

Other factors in the dollar's favor include a potential reversal of the Big Trade of 2009. In 2009, as risk abated, everything went up and the dollar went down. Now, risk is making a bit of a comeback – the dollar (the safe haven) could go up. Another factor is, with the troubles in Europe, the euro has little chance of competing with the dollar as the world's reserve currency.

I could go on... But in short, this type of opportunity doesn't come along often.

The euro is in a horrible situation right now. A mountain of factors is against it. It is overpriced. And in the last two months, a firm downtrend has been established. It is time to bet against the euro.

This post has been republished from Steve Sjuggerud's blog, Daily Wealth.

Big Week For US Dollar and Euro

How will the sell off of a record $104 billion in US Treasury notes affect the strength of the dollar? Meanwhile in Europe, Germany is facing a record debt of it's own. Forex expert Kathy Lien tells us what we should watch for this week in the foreign exchange market.

German business confidence improved marginally which should have been bullish for the euro, but unfortunately the most actively traded currency pair in the forex market has remained under pressure throughout the European and U.S. trading sessions. So if the EUR/USD is not responding to economic data then what is driving it lower?

Five factors:

1. U.S. Treasury Auction

One of the big focuses of foreign exchange traders this week is the massive Treasury auction. The U.S. government will be issuing a record $104 billion of 2 year, 5 year and 7 year Treasury notes between Tuesday and Thursday. The reason why currency traders are watching these auctions is because of its scale and also because it will shed some light on investor’s willingness to fund the U.S.’ large and growing budget deficit. The auctions will be a big hurdle for the U.S. dollar this week because if demand comes up short, the dollar could get hit but it is not that simple because at the same time, weak demand could drive up yields, which is dollar positive. Either way, over the next couple of days, there will be a lot of focus on the Treasury auctions.

2. First ever 12 month ECB refinancing

The ECB refinancing is the biggest story for the EUR/USD this week because the 12 month offer is seen by bond traders as a quasi quantitative easing effort by the ECB because the operations are most likely going to be collateralized by government bonds which can then be posted as collateral to the ECB for funding. Although ECB President Trichet warned that their monetary policy actions can be easily unwound if needed, he also said that policy makers must remain alert despite signs that the slump is decelerating because “there are still risks of a sudden emergence of unexpected financial turbulence.”

3. Fears that German Debt Could Explode

As for Germany, Deputy Finance Minister Werner Gatzer said that total new debt could exceed EUR100 billion next year, which would be much larger than this year’s record financing needs of EUR80 billion. Looking ahead, we could see further weakness in the EUR/USD if Tuesday’s PMI figures fall short of expectations. Despite the improvement in business confidence, which was driven entirely by the expectations component of the report, current conditions remain weak.

4. Comments from ECB President Trichet

Although ECB President Trichet warned that their monetary policy actions can be easily unwound if needed, he also said that policy makers must remain alert despite signs that the slump is decelerating because “there are still risks of a sudden emergence of unexpected financial turbulence.” These bearish comments came after ECB member Nowotny said this morning that interest rates could remain unchanged into 2010.

5. Tuesday’s PMI numbers

However in the near term, weaker economic data could keep the EUR/USD pressured. German industrial production, factory orders and retail sales have all declined which could prevent a meaningful pickup and possibly even deterioration in manufacturing and service sector PMI.

This article can also be viewed at Kathy Lien's foreign exchange blog.