Purchasing Power Parity - PPP
A theory that supports the law of one price. The theory says that the price of one product should be the same across countries. So, the exchange rates should adjust to reflect this 'one-price' scenerio. Otherwise, international arbitage could incur until exchange rates adjust and the law of one price holds.
For example, if bigmac costs 2 euro in Germany, and the same bigmac costs 100 thai baht in Thailand, then the exchange rate should be 50 baht per euro.
If baht is depreciated in relative to euro (the exchange rate is more than 50 baht per euro), then Some German people will not buy any bigmac from Germany. Rather, they will import bigmac from Thailand (because Thai bigmacs are cheaper) and resell in Germany to get immediate gains.
So.. what happens next? Germans will demand more Thai baht to purchase bigmac from Thailand. More demand for Baht currency would result in appreciation of Thai baht... The exchange rates would then adjust until international arbitage is not profitable.
NOTE: the PPP theory assumes no taxes, no transportation expenses, no transportation risks..