Beyond the evident slowdown in the global economy in recent months, as a result of the resurgence of Covid-19, we believe that this should be adequately offset by greater policy support, especially in China, which would move from financial repression to a more accommodative stance, either by easing monetary policy or through some form of more targeted fiscal stimulus, or a Federal Reserve that has to delay any announcement of a reduction in asset purchases until December, which remains our base case scenario.

However, we have always argued that this post-COVID recovery would not be without challenges, that it would be uneven across regions, and that it would ultimately take the form of a "staggered recovery,", as different regions were affected by COVID-19 at different times. China was the first to enter, the first to exit, and the US recovered later (peak quarterly GDP growth was higher in Q2 2021), followed by Europe (peak quarterly GDP growth in Q3 2021) and, finally, emerging markets ex-China, all in conjunction with the easing of COVID-19 mobility restrictions.

These different recovery times help explain very well the performance of assets in different regions, with an exceptionally strong United States, which has been the driving force behind global equities for much of the year, and now we are seeing Europe catching up. Is EM next in line? As vaccinations increase and reopening occurs, emerging markets are expected to reestablish their GDP growth premium over US GDP by 4Q21 and thus resume superior equity performance.

But let's get to the point. These same economic divergences allow us to explain the behavior of the currency market quite well. A stronger US economy and the expectation of an early normalization by the Fed have led to a stronger dollar, prompting the market to drastically reduce its original expectations of a weaker dollar in 2021.

Well, we have not yet given up on our thesis of greater dollar weakness, and recent events give us enough confidence to persist in that call. While economic data has been disappointing in most regions, after China, the US is where this has become most evident (just look at this week's disappointing employment data and the substantial drop in consumer confidence, to name a few).

However, if we look at Europe, the loss of momentum has been more moderate, and with a significant wild card, higher inflation, which has even led to voices within the ECB calling for an early withdrawal of stimulus measures. We do not believe this will happen because Europe still has some way to go to recover its pre-pandemic levels of activity and has considerably more slack than the US, especially in the labor market. but we do believe that better momentum in Europe (vs. the US) could do much to reduce its relative attractiveness compared to the dollar.

In practice, both rate differentials and economic surprise differentials have been leaning in favor of the euro (weaker dollar), a trend that we expect to become more pronounced in the coming weeks, especially if the Fed maintains a cautious tone in September.

If this is correct, expect better relative performance of ex-US assets and higher commodity prices (due to the denomination effect).