Outlook:

Today sees the release of June 19 FOMC minutes (2 pm) and the Bernanke speech (4:10 pm). Since we already have the main gist, the minutes will be parsed for whatever nuggets of data dependency can be found and whatever disagreements among members might seem juicy.

Amid the talk of policy shift at the Fed, going little noticed is a new proposal by US regulators to raise big banks’ capital by a vast amount. This is an instance of “macroprudential” policy that we complained about yesterday, albeit not from the Fed alone. In a nutshell, the Fed, FDIC and Comptroller of the Currency are ganging up to propose banks be forced to double capital against the entire balance sheet and not just assets self-identified as risky. Only two of the big 8 (BoA and Wells Fargo) would not have to raise massive amounts of capital, such as $15.6 billion at JP Morgan. The WSJ has a list.

Let the lobbying begin! The industry complains that such high capital requirements (5-6%, or double the Basel number) is intrusive over-regulation and makes US banks uncompetitive. Nonsense. It makes US banks more desirable and the US system more stable. Of the many implications, we like that the financial regulatory troika is addressing the public distrust of banks, which is nearly as bad as its distrust of Congress (with only about 10% having a favorable attitude toward either). It’s also an explicit slap at allowing banks to identify and classify riskiness. This was always a direct conflict of interest and had, of course, failed in 2008.

It’s early days, but if the regulatory initiative goes forward with too much watering down, it’s a long-lasting improvement in an already pretty good system (or at least better than in Europe). One enduring dollar support is a stable financial infrastructure that offers high liquidity and variety. Capital improvement can only add to that.

The other background story that is sure to have a lasting effect is the IMF explicitly recognizing that rising rates in the US will have deep global ripple effects, especially for emerging markets. The China slowdown is an exacerbating factor. Emerging market growth will be 5% this year, from 5.3% forecast in April. World growth will be 3.1% from 3.3% in April. Governments that just figured out they needed to address rising currencies and hot money inflows are suddenly dealing with hot money outflows and falling currencies. The WSJ reports investors have withdrawn $13.5 billion from emerging-market bond funds and $22 billion from emerging market equity funds in just the past 6 weeks. EM equities are down 10% since June and EM sovereign debt is down 8.3%.

We should probably assume that the dollar and US assets are a key beneficiary of these flows. The BoJ policy meeting today and tomorrow is not seen as a wild card, but this may be a mistake. The management of the yen devaluation and Abenomic plan is somewhat rocky. A little more of that new machismo is called for, but the Abe teams seems to be doling it out in dribs and drabs. Anyway, it would be unwise to accept the consensus of no change, no announcements. The risk is to the upside (for the dollar).

SPOTCURRENT POSITIONSIGNAL STRENGHTOPEN DATEOPEN RATEPOSITION GAIN/LOSS
USD/JPY100.13LONG USDSTRONG06/24/1397.922.21%
GBP/USD1.4885SHORT GBPWEAK06/27/131.52832.60%
EURO/USD1.2813SHORT EUROWEAK06/27/131.30251.63%
EURO/JPY128.29LONG EUROWEAK07/01/13129.98-1.30%
EURO/GBP0.8607LONG EUROWEAK06/20/130.85350.84%
GBP/JPY149.03LONG GBPWEAK07/01/13151.65-1.73%
USD/CHF0.9691LONG USDSTRONG06/26/130.93993.01%
USD/CAD1.0520LONG USDSTRONG06/24/131.05140.06%
AUD/USD0.9199SHORT AUDSTRONG04/16/131.039411.50%
AUD/JPY92.11LONG AUDNEW*WEAK07/09/1392.110.00%
USD/MXN12.8990SHORT USDNEW*WEAK07/09/1312.89900.00%