Next They’ll Be Calling It The McCurrency War
We’ve heard a lot about the currency war, but next thing you know they’ll be calling it the McCurrency War. If we needed any proof that the Chinese yuan is 40 per cent undervalued, we finally got it from the Economist. The magazine’s famous Big Mac Index compares the prices of a Big Mac in various countries making exchange rate theory more easily digestible.
The Economist reported that in China a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America the same burger averages $3.71. The average wage is higher in the US, so theoretically Big Macs can be more expensive, but still, the discrepancy is clearly visible.
That makes China’s yuan one of the most undervalued currencies in the magazine’s Big Mac index, which is based on the idea of purchasing-power parity. This says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. At just $0.15, it is undervalued by about 40%.
As we have written before, the currency war is a sticky issue that just won’t let go. Because China pegs the yuan to the dollar, and keeps the rate of the yuan artificially low, exporters in other countries have been losing their competitive edge against China, their chief rival in the global markets. In response, many governments are taking measures to lower the value of their currencies.
In the technical part of this week's essay we're going to focus on gold. On the very long-term gold chart (charts courtesy by http://stockcharts.com.) we see declines have moved lower after having touched the long-term resistance level, the upper border of the very long-term trading channel, marked with thick blue line. This is not surprising as a breakout above resistance of this strength is not expected on a first attempt. After that, we look forward to see this trading channel to accelerate.
It now appears that the rally has been held and although a correction is surely underway, it is barely visible in this chart. The decline is simply not severe enough to be clearly seen from a very long-term perspective. This could be also an additional indication that the price did not fall enough.
The long-term chart for gold allows us to illustrate likely target levels for the near-term. We have not changed our sentiment or the target levels themselves, as further declines appear likely. Fibonacci retracement level analysis points to two important downside target levels. These are seen in our chart marked with red ellipse.
The first long-term support line may appear to have stopped the recent decline. This is however unlikely as it is but a minor support line and quite weak. We can see that it has been broken through on several occasions in the past. This was seen in August and September and for this reason, it is unlikely to have anything more than a slight, temporary effect upon the declining trend. The short-term gold chart with detailed targets is available to our Subscribers.
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Thank you for reading. Have a great and profitable week!
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