PPP (Purchasing Power Parity) Undervalued Currencies Ranking 2024

What is Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is one of the most fundamental concepts for theoretically calculating the appropriate level of exchange rates. It derives from the idea based on the law of one price that the same goods and services should be purchasable at the same price in different countries.

Basic Principle of PPP

If a Big Mac costs 390 yen in Japan and $5.69 in the US, the PPP-based exchange rate would be 390 / 5.69 = 68.5 yen/dollar.

When the actual exchange rate deviates from the PPP level, that currency is judged to be "undervalued" or "overvalued."

Historical Background of PPP Theory

PPP theory traces back to the School of Salamanca in the 16th century, but the modern formulation was established by Swedish economist Gustav Cassel in 1918.

Era	Development	Key Contributors
16th Century	Law of one price concept	School of Salamanca
1918	PPP theory formulation	Gustav Cassel
1970s	Empirical research development	Central banks, IMF
1986-	Big Mac Index	The Economist

Why PPP Matters

• Long-term equilibrium exchange rate: Long-term tendency for exchange rates to converge to PPP
• Currency over/undervaluation judgment: Reference indicator for investment decisions
• International comparison standard: Basis for comparing GDP and living standards across countries
• Relationship with inflation: Theoretical basis for long-term depreciation of high-inflation country currencies

Types of PPP and Calculation Methods

There are multiple types of PPP, used according to purpose.

Absolute Purchasing Power Parity

Calculates exchange rates by comparing prices of identical baskets of goods and services.

Formula:

PPP Rate = Country A price basket / Country B price basket

Example:

• Japanese consumer price basket: 100,000 yen
• Equivalent US basket: $1,000
• PPP Rate: 100,000 / 1,000 = 100 yen/dollar

Relative Purchasing Power Parity

The concept that exchange rate change equals the inflation differential between two countries.

Formula:

Exchange rate change ≈ Country A inflation rate - Country B inflation rate

Example:

• Turkey inflation rate: 60%
• Japan inflation rate: 3%
• Theoretical lira depreciation: ~57%

Big Mac Index

A PPP indicator based on Big Mac prices published by The Economist since 1986.

Pros	Cons
Simple and easy to understand	Single product limits representativeness
Easy data access	Includes non-tradable goods (services)
Regular updates	Doesn't reflect wage levels by country

OECD PPP Rates

The OECD publishes PPP rates based on comprehensive price surveys, calculating more precise PPP from surveys of over 3,000 items.

PPP Data Sources

Data sources for conducting PPP analysis.

Major Data Sources

Data Source	Content	Update Frequency	URL
OECD	Comprehensive PPP rates	Annual	data.oecd.org
World Bank	ICP (International Comparison Program)	Every 3-5 years	worldbank.org
IMF	WEO database	Semi-annual	imf.org
The Economist	Big Mac Index	Semi-annual	economist.com

Points for Data Utilization

• Compare multiple sources: Don't rely on a single PPP, check multiple indicators
• Time series changes: Check trends from past, not just current point
• Calculate deviation rate: Understand difference from actual exchange rate as percentage

2024 Undervalued Currency Ranking

Here's the PPP-based undervalued currency ranking as of April 2024. Deviation rate shows how far actual exchange rate is from PPP level (negative = undervalued).

Developed Market Currency Undervaluation Ranking

Rank	Currency	PPP Rate (vs USD)	Actual Rate	Deviation
1	Japanese Yen (JPY)	~95 yen	~155 yen	-39%
2	Korean Won (KRW)	~950	~1,350	-30%
3	British Pound (GBP)	~0.72	~0.80	-10%
4	Canadian Dollar (CAD)	~1.25	~1.37	-9%
5	Euro (EUR)	~0.82	~0.93	-12%

Emerging Market Currency Undervaluation Ranking

Rank	Currency	Deviation	Main Factors
1	Turkish Lira (TRY)	-72%	High inflation, political risk
2	South African Rand (ZAR)	-58%	Power crisis, structural issues
3	Indonesian Rupiah (IDR)	-52%	Current account deficit, EM risk
4	Indian Rupee (INR)	-48%	Inflation, capital outflow
5	Mexican Peso (MXN)	-35%	Emerging market premium
6	Brazilian Real (BRL)	-32%	Fiscal concerns, political risk
7	Chinese Yuan (CNY)	-28%	Property crisis, capital controls

Overvalued Currencies

For reference, currencies evaluated as overvalued on PPP basis.

Currency	Deviation	Main Factors
Swiss Franc (CHF)	+42%	Safe haven premium
Norwegian Krone (NOK)	+18%	Resource nation, high income

Currency to Watch: Japanese Yen

The most notable as of 2024 is the significantly undervalued state of the Japanese Yen.

The Japanese Yen is exceptionally 39% undervalued for a developed market currency, levels not seen since the 1970s. With BOJ monetary policy normalization, long-term correction toward yen strength is expected.

Analysis Methodology

Practical methods for conducting PPP-based undervaluation/overvaluation analysis.

Deviation Rate Calculation

Formula:

Deviation Rate = (PPP Rate - Actual Rate) / Actual Rate x 100%

Example (USD/JPY):

• PPP Rate: 95 yen/dollar
• Actual Rate: 155 yen/dollar
• Deviation Rate: (95 - 155) / 155 x 100% = -39%

Duration Analysis of Deviation

PPP deviations can persist for extended periods. Analyzing deviation duration helps evaluate correction probability.

Duration	Interpretation	Trading Implication
Under 1 year	Temporary deviation	Wait and see
1-3 years	Possible structural factors	Factor analysis
3-5 years	Long-term deviation, correction pressure building	Monitor reversal signs
5+ years	Extreme deviation, high reversal risk	Consider long-term positions

Balassa-Samuelson Effect Consideration

The phenomenon of emerging market currencies being chronically undervalued versus PPP is explained by the Balassa-Samuelson effect.

• Theory: Non-tradable goods prices are lower in less productive countries
• Implication: EM currency undervaluation is "natural"
• Adjustment: Use "adjusted PPP" adjusted for income levels

Income-Adjusted PPP Deviation

Calculate income level-adjusted PPP deviation.

Formula:

Adjusted Deviation = Actual Deviation - Expected Deviation (estimated from income level)

Currency	Simple Deviation	Expected Deviation	Adjusted Deviation
Japanese Yen	-39%	0%	-39% (abnormally undervalued)
Turkish Lira	-72%	-40%	-32% (undervalued)
Mexican Peso	-35%	-30%	-5% (near fair value)

Trading Applications

How to apply PPP analysis to FX trading.

Strategy 1: Mean Reversion Strategy

Strategy based on the premise that PPP deviations are corrected long-term.

Entry Conditions

• Deviation exceeds 2 standard deviations from historical average
• Deviation has persisted for 3+ years
• Signs of fundamental improvement

Position Example: Long Yen

• Rationale: Yen 39% undervalued, historic levels
• Entry: Gradually build yen long position
• Target: 30%+ return from correction toward PPP (95 yen)
• Timeframe: 2-5 year long-term investment

Strategy 2: Carry Trade Screening

Use PPP analysis to refine carry trade currency selection.

Currency	Rate Differential	PPP Deviation	Overall Assessment
Mexican Peso	High	Somewhat undervalued	Attractive
Turkish Lira	Very high	Significantly undervalued	High risk (may continue falling despite undervaluation)
Swiss Franc	Low	Overvalued	Avoid (short candidate)

Strategy 3: Pair Trade

Pair trade combining two currencies with different PPP deviations.

Pair Example: Long Yen vs Short Swiss Franc

• Yen: 39% undervalued
• Swiss Franc: 42% overvalued
• Theoretical return opportunity: 81% deviation correction potential
• Risk: High correlation as both are safe-haven currencies

PPP Trade Timeframe

PPP-based trades are inherently long-term strategies. Short-term can deviate significantly from PPP levels, requiring multi-year investment horizons.

PPP Analysis Limitations

PPP analysis has important limitations. Understanding these when utilizing is critical.

1. Lack of Short-Term Predictive Power

PPP indicates long-term equilibrium levels and is not suitable for predicting short-term currency movements.

• Deviations can widen for years
• Combination with other indicators needed for short-term trading

2. Measurement Difficulties

Accurate PPP calculation faces the following challenges:

• Price basket composition differences
• Quality difference adjustments
• Non-tradable goods treatment
• Data availability

3. Structural Change Response

Economic structural changes may alter the appropriate PPP level itself.

• Productivity changes
• Trade structure changes
• Capital flow liberalization

4. "Undervalued" Does Not Equal "Will Rise"

The most important caveat is that undervalued currencies don't necessarily appreciate.

• Turkish Lira has been undervalued for years but continues falling
• As long as fundamentals continue deteriorating, even undervalued currencies fall
• PPP corrects "eventually" but "when" is unknown

5. Combine with Other Analysis

Recommended to combine PPP analysis with the following rather than standalone.

Analysis Method	Complementary Perspective
Interest rate differential analysis	Short-medium term direction
Current account analysis	Capital flow sustainability
Political risk analysis	Sudden movement risk
Technical analysis	Entry/exit timing

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PPP analysis is a powerful tool for understanding long-term equilibrium exchange rate levels. However, simple judgment of "undervalued = buy" is dangerous. Make investment decisions after conducting multi-faceted analysis including fundamental changes, interest rate differentials, and political risk. The exceptional undervaluation of developed market currencies like the Japanese Yen may provide interesting opportunities for long-term investors, but timing requires caution.