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What a Big Mac Tells Us About World Currencies Today

Monday, March 13, 2017 4:45
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The big opportunities in currencies happen at extremes…
That’s the moment that you want to consider trading them.
I don’t trade currencies that often. But when these extremes materialize, I get in.
We haven’t seen many currency extremes lately. But we are about to…
The U.S. dollar has gained roughly 25% in three years against the world’s major currencies.
Said another way, the world’s major currencies have lost a heck of a lot of ground against the U.S. dollar – in just three years.
Finally, we are approaching extreme levels. We are reaching the point where we will look to get some money outside the U.S. dollar again.
But where are the extremes?
The United Kingdom and Mexico are the obvious choices. Let’s look at the U.K. first…
The British pound has fallen from 1.70 (in 2014) to 1.20 versus the U.S. dollar since the people of Britain voted to leave the European Union.
The fall has been terrible… For the last 30 years, the British pound had always rallied whenever it dropped to around 1.40. But not this time. Take a look:
The pound is the cheapest it has been in 30 years, relative to the dollar.
And that’s not just on the exchange rate. England is CHEAP right now…
Historically, a trip to merry old England was expensive for Americans – everything cost more than it did back home. But now the situation is the opposite.
This next chart shows a simple example… It’s the cost of a McDonald’s Big Mac in England versus the cost of one in the U.S. (I use this as a quick-and-dirty way to size up the relative values of currencies.)
From 1999 to 2007, a Big Mac in Britain was dramatically more expensive than one in the U.S. Now it’s the opposite – to a record extreme.
In my investing lifetime, I’ve never been able to buy into Britain this cheap.
I’m not rating the British pound a “buy” yet, because the downtrend is still in place. But I am close.
The story in Mexico is similar…
The Mexico peso is the cheapest it has been in decades.
Thanks in part to Trump’s rhetoric, the decline in the Mexican peso has accelerated. A Big Mac in Mexico is 56% cheaper than one in the U.S. That’s the record-cheapest value for the Mexican peso in two decades’ worth of data. Take a look:
I am not buying the British pound or the Mexican peso just yet…
If you’re a longtime reader, you know why – I want to wait for the uptrend to confirm this idea before I get into it.
But I will get in. These are multi-decade lows. This is an exceptional moment.
We will take advantage of it… Just not yet.
Put the British pound and the Mexican peso on your radar. When the uptrend returns, consider buying British and Mexican investments.
Good investing,
Steve


Source: http://www.stansberryresearch.com/dailywealth/3490/what-a-big-mac-tells-us-about-world-currencies-today

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