The currencies and assets of many EMEs contain risk premiums that reflect their creditworthiness compared with that of the United States.
These risk premiums can be time-varying and correlated with the global financial cycle: they rise during “risk-off” periods and they fall during “risk-on” periods.20 Canada’s credit risk premium has been reduced to a very low level as a result of our strong economic and financial fundamentals, which underlie our AAA credit rating (Chart 5).