Many EM countries have implemented unprecedented fiscal and monetary policy responses to the COVID-19 shock, reflecting improvements in economic fundamentals. We do not believe that these changes present an impediment to EM currencies benefitting from a multi-year US Dollar weakening cycle.

Although fiscal deficits and government debt stand higher compared to the beginning of the last three cycles of USD depreciation, external debt to GDP is comparable to the last major USD depreciation cycle of 2002 and inflation is substantially lower.

Moreover, historically during periods of USD depreciation, high fiscal risk currencies, as measured by a combination of low GDP growth, high government debt, low fiscal balance and low current account have generated higher returns than currencies with low fiscal risk (13.7% per annum vs 10.2% per annum). However, the return/volatility ratio is better for low risk currencies (2.4 vs 1.9).

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