Big Mac Index shows Czech crown is undervalued against the US dollar

According to the Big Mac Index, the Czech crown was undervalued against the U.S. dollar by 18.6 percent at the end of July. In the U.S., one Big Mac costs USD 5.69, while in the Czech Republic, it costs CZK 109. The theoretical exchange rate should be around CZK 19.16 per dollar. Still, the current exchange rate is CZK 23.53 per dollar, Petr Lajsek, an analyst at finance firm Purple Trading, citing index data, told the Czech News Agency.

Lajsek noted that the index reached practically the same value during the last comparison at the end of January. Even last July, the koruna was undervalued by only 13 percent.

“The comparison is also interesting from the point of view of inflation. In the Czech Republic, Big Macs rose in price by around 4 percent year-over-year, and in the U.S. by only 1.7 percent. June year-over-year inflation in the Czech Republic reached 2; in the U.S., it was 3 percent,” Lajsek said.

The Polish zloty is currently undervalued by 7.4 percent against the dollar, a decrease from nearly 13 percent in January, due to high interest rates attracting speculators. The Hungarian forint is undervalued by 31.5 percent, while the Japanese yen remains highly undervalued by 43.9 percent due to loose monetary conditions. Overvalued currencies now include the Swiss franc (41.8 percent), Uruguayan peso (24.3 percent), and Norwegian krone (18.9 percent).

According to Lajsek, the major undervaluation of the crown compared to the dollar is mainly due to interest rates. While the Czech National Bank started lowering interest rates last December and has continued this year, the U.S. Federal Reserve has kept rates unchanged, allowing the dollar to strengthen significantly until April.

The Big Mac Index, compiled by media firm The Economist twice a year, compares the purchasing power of various world currencies by looking at the cost of a Big Mac in different countries. It is meant to indicate the overvaluation or undervaluation of exchange rates, as Big Mac sandwiches are available practically worldwide.