Why the humble Big Mac is proof that Australian money is woefully undervalued

The popular Big Mac is a sign the Australian dollar is undervalued and finance experts predict it will be worth more in coming months.

The Economist newspaper has since 1986 used the prices of the ubiquitous McDonald’s hamburger to determine the strength of exchange rates. 

Big Macs typically sell for $6.55 in Australia, compared with $US5.71 in the United States.

With the Australian dollar now worth 69.86 US cents, that American price for two beef patties on a sesame seed bun translated into $A8.15. 

One American dollar is worth $A1.43, which The Economist’s Big Mac Index calculated made the Australian dollar 19.8 per cent undervalued. 

IG market analyst Kyle Rodda said the Australian dollar was likely to get stronger and be worth 73 US cents in coming months if COVID-19 cases were contained.

This would make imported goods and overseas holidays, when they are eventually allowed again, cheaper.

‘You could probably see an Australian dollar up to 72, 73 cents within the next couple of months if the virus were to look like it was being controlled especially in the United States,’ Mr Rodda told Daily Mail Australia. 

‘If there was a realistic chance a vaccine would emerge in the next couple of months and that vaccine would become available probably before the end of the year or the start of next year – in that instance, you’d see the Australian dollar rally quite considerably.’ 

The Australian dollar fell below to 55.71 US cents in March, sinking to levels unseen since 2002, as the share market’s benchmark S&P/ASX200 index plunged by 38 per cent since peaking just one month earlier.

One American dollar is worth $A1.43, which The Economist’s Big Mac Index calculated made the Australian dollar 19.8 per cent undervalued. IG market analyst Kyle Rodda said the Australian dollar was likely to get stronger and be worth 73 US cents in coming months if COVID-19 cases were contained

The local currency has recovered since that time as both the American and Australian stock markets have largely bounced back despite fears the coronavirus pandemic will spark the steepest downturn since the 1930s Great Depression. 

The S&P/ASX200 has surged by more than 35 per cent since sinking to an eight-year low of 4,446 index points on March 23 and was worth 6,033.6 points on Friday, with the market rising by 0.38 per cent.

Historically, the Australian dollar’s fortunes have been closely tied with commodity prices like iron ore.

Mr Rodda said there was now a stronger correlation between movements in the Australian dollar and share markets as governments around the world pumped money into the financial system to alleviate the effects of a deep recession.

Big Macs typically selling for $6.55 in Australia, compared with $US5.71. With the Australian dollar now at 69.86 US cents, that American price for two beef patties on a sesame seed bun translates into $A8.15. Pictured is a McDonald’s at Circular Quay in Sydney

‘There’s so much stimulus in the world and so much money being pumped into financial markets that once we a bit of clear runway with the virus and the economic recovery, that’s a lot of upside potential in the global economy,’ he said.

Westpac’s head of foreign exchange strategy Richard Franulovich said the Australian dollar was holding well despite the surge in Melbourne coronavirus cases.

‘It remains resilient, rounding out the week just below 70 cents, despite second wave virus concerns in the US and Australia – raising doubts about recovery momentum – and the ongoing breakdown in US-China relations,’ he said.

In a sign of slightly more buying power, Daily Mail Australia saw Big Macs in central Sydney selling for $6.35 on Friday.