The Starbucks Index – Coffee Price Parity

The Starbucks Index – Coffee Price Parity

Tyler Durden on 02/27/2013 09:44 -0500


Despite Abe’s protestations, it would appear – from WSJ’s index of Starbucks coffee prices around the world – that Japan’s currency ‘value’ is similar to the US while it is Mr. Hollande (in France) that has more reason to hope for a currency devaluation in his country. With India and Mexico showing the lowest price for a grande latte (suggesting undervalued currencies), it appears Europeans (from Madrid to Paris to Athens) pay significantly more for a latte than even the New Yorkers. Forget the Big Mac Index, forget Purchasing Power Parity – the Scandinavians are suffering from over-priced currencies and significant divergence from Coffee Price Parity.

February 21, 2013, 4:49 p.m. ET

On Currencies, What’s Fair Is Hard to Say

Countries’ Heated Rhetoric Points Out Lack of a Universal Measuring Stick


What’s the fair value of a euro? That depends on whether the answer comes from Berlin or Paris.

German Chancellor Angela Merkel on Wednesday weighed in on what the currency should be worth, saying the euro’s exchange rate is “normal in the historical context.” French Finance Minister Pierre Moscovici had a different take earlier this month, calling the euro “perhaps too strong.”

Economists say Ms. Merkel is right—technically. The euro’s buying power is roughly where it should be, according to the Peterson Institute for International Economics, which judges currencies based on countries’ current-account balance. But others caution Germany’s relatively robust economy props up the euro’s value; if weaker countries like Spain or Italy still had their own currencies, they’d be worth much less.

A weaker euro could help Europe’s struggling economies by making their exports more competitive. However, a too-cheap currency can trigger runaway inflation.

“What is fair for one part of the zone, is very unfair for other parts of the zone,” said Amer Bisat, a managing partner at Traxis Partners, which has $300 million in assets, and who teaches a course on monetary theory at Columbia University. “The euro is arguably undervalued for the North, and overvalued for the South.”

Similar debates over what constitutes “fair” in the currency world are playing out in legislatures and central banks around the world. Some U.S. politicians have accused China of keeping the yuan unfairly depressed to give its exports a leg up. Leaders across Asia have complained this year that Japan is pushing the yen too low, saying they will match with currency-weakening policies of their own. Some analysts say the rhetoric has snowballed into a global currency war, where countries are competing to devalue their currencies.

It is a fight that is complicated by the lack of a universally acknowledged measuring stick for a currency’s proper value. Economists use a battery of data points, including comparing what the same product would cost in different countries or measuring the value of income and investment an economy takes in versus what it spends. Even then, they can come out with wildly different ideas of which major currencies are artificially strong or weak.

While most models peg the euro’s value—about $1.32 on Thursday—as roughly correct, they are split on the yen. Makena Capital Management, which ranks currencies using eight economic variables, including inflation and the state of a country’s finances, says Japan’s currency may fall as low as ¥120 against the dollar as the country adjusts its monetary policies. Meanwhile, according to the Peterson Institute, the yen has already fallen 12% below its fair value of ¥84.

“It could be a bit of a judgment call,” said Aroop Chatterjee, chief foreign-exchange quantitative strategist at Barclays in New York. He looks at several models, keeping an eye out for instances where they all agree a currency is too strong or weak.

One way to determine how currencies stack up is purchasing-power parity, or PPP, which compares the amount of currency needed to buy the same item in different countries. A grande latte atStarbucksSBUX +0.13% for example, costs $4.30 in New York, but the equivalent of $9.83 using Norwegian krone in Oslo, and just $3.92 in Turkish lira in Istanbul. Economists say PPP is of limited use, however, as it doesn’t account for factors like a country’s finances and trade flows.

Even the International Monetary Fund—whose economic models serve as a benchmark for financial firms and governments world-wide—is re-evaluating how it assesses exchange rates.

The IMF has for many years used three separate calculations to create a rough range for how a currency’s value compares with a basket of its rivals. Its formulas rely on economic data, including comparing a country’s trade deficit or surplus to where it should be based on its underlying economic characteristics, or an exchange rate’s long-term average.

On a trial basis, the fund is expanding its models to include how much a country has influenced its exchange rate by buying or selling its own currency in the open market.

IMF Managing Director Christine Lagarde said on Feb. 15 that there had been “no major deviation from fair value” in major currencies recently.

“Yes, the euro strengthened. Yes, the yen depreciated. But that was caused by recent good policies taken in Europe and recently revised, looser monetary policy taken in Japan,” she told Group of 20 finance ministers and central bankers in Moscow.

For certain currencies, models broadly agree they are too expensive, or too cheap.

The New Zealand dollar, known as the kiwi, is almost 19% stronger than it should be based on economic fundamentals, according to the Peterson Institute. Its value has been buoyed by investors attracted to the country’s bonds, which yield more than most other developed economies’ debt. Reserve Bank of New Zealand Gov. Graeme Wheeler Wednesday called the kiwi “significantly overvalued” and said the central bank would intervene “when the circumstances are right.”

On the other side of the equation, most models point to the Swedish krona as undervalued, even though it has strengthened more than any other major currency against the dollar this year.

As difficult as it is coming up with the perfect currency model, many of the systems available now tend to work—if given enough time.

“Around 50% of undervaluations tend to be erased within five years,” said Alan Ruskin, a strategist at Deutsche Bank in New York. “Over the long term, these models do provide value.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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