Rand is 50% undervalued, Big Mac index shows

The latest update to The Economist's Big Mac index shows that - theoretically - the rand should be trading at R8.94/US dollar.

The index compares the prices of McDonald's Big Mac hamburgers in different countries to determine whether currencies are overvalued, or too cheap.

The idea is that an identical product must cost the same across countries and that a disparity indicates whether the local currency is not at the correct value. The index has been compiled since 1986.

A Big Mac costs R49.90 in South Africa and US$5.58 in the United States.

"The implied exchange rate is 8.94. The difference between this and the actual exchange rate, 17.78, suggests the South African rand is 49.7% undervalued," The Economist says.

A year ago, the rand was 55% undervalued. South Africa has often been the world's most undervalued currency, and in 2020 was undervalued by 70%.

Interest rates

But currently, the currencies of India (-55%), Egypt (-53%), and Taiwan (-57%) are more undervalued. The rand has lost more than 10% of its value against the US dollar over the past year.

The rand has been hit by aggressive hikes in global interest rates.

Investors are used to South Africa offering much higher interest rates than developed markets like the US, which has made rand investments attractive. But following aggressive US rate hikes, that differential has now shrunk.

The rand is also closely linked to commodity prices, which have fallen over recent months – along with South Africa's close ties to Russia.

The euro ( 4%) and the Swiss franc ( 39%) are overvalued against the US dollar, according to the index. – Fin24