Emerging market currencies as a group are on the verge of testing lows not seen since late 2016 when the “Trump trade” was fueling expectations for a surge in multi-pronged fiscal stimulus and inflation. As it turns out, reflation expectations weren’t so far off the mark. Higher interest rates in the US are pulling capital away from emerging markets as the ability to borrow cheap dollars and invest in riskier, higher yielding EM markets (carry trade) fades. This is beginning to expose massive imbalances that were enabled during the QE era by central planners choosing temporary demand stimulus over structural reforms. Late-cycle fiscal stimulus in the US is tossing gasoline on the fire.

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