USD/JPY Fundamental Daily Forecast – Muted Price Action Amid Anticipation of Post-Election Volatility

The Dollar/Yen is trading lower on Tuesday on low volume while posting a tight range. The price action suggests many of the major players are on the sidelines on Election Day in the United States. Better-than-expected economic data failed to move the needle much with some traders waiting to make a trading decision after the release of the minutes of the latest monetary policy meeting from the Bank of Japan at 23:50 GMT late Tuesday.

At 06:58 GMT, the USD/JPY is trading 104.652, down 0.106 or -0.10%.

Yen Implied Volatility Highest Since April as Traders Prep for US Election

One-week implied volatility gauging levels in the Japanese Yen rose to their highest since the beginning of April, reflecting traders’ angst ahead of the U.S. election on Tuesday. Traders are saying that volatility is rising because liquidity for hedges around the election is very thin.

Japan’s Factories Extend Activity Declines to 18^th Month-PMI

Japan’s factory activity declined for a record 18^th month in October due to weakening output, new business and employment, but export orders grew for the first time in two years in an encouraging sign for the coronavirus-ravaged economy.

The world’s third-largest economy is struggling to regain traction after suffering its worst postwar slump in the second-quarter, with lackluster business and household spending at home threatening to put the brakes on any recovery.

The final au Jibun Bank Japan Manufacturing Purchasing managers’ Index (PMI) rose to 48.7 in October from the previous month’s 47.7, staying below the 50.0 threshold that separates contraction from expansion for a record 18^th consecutive month.

But the final figure beat a preliminary 48.0 reading and indicated manufacturing activity contracted at its slowest pace since January, when the health crisis had already started affecting the global economy.

The PMI survey showed output, new orders and work backlog contracted again, although at a more modest pace, while employment conditions deteriorated at a faster speed for the first time in four months.

Export orders posted growth for the first time in nearly two years, primarily thanks to improved demand across the Asia-Pacific region.

“Japanese manufacturers will be particularly buoyed by the return to growth in export orders,” said Usamah Bhatti, economist at IHS Markit, which compiles the survey.

Daily Forecast

After last week’s steep plunge in the USD/JPY and the aggressive option buying spree, volume has lightened up and we’ve seen some countertrend buying. The moves have been muted, however, as most investors have locked in positions on a pre-election stance.

Many of the major players have trimmed their positions in the Japanese Yen ahead of the election due to the perceived risk. Given the expectation of heightened volatility, they have chosen to trade the post-election volatility in the options market.

As far as the impact of the election is concerned, opinion polls have consistently showed Democrat challenge Joe Biden leading President Donald Trump.

A Biden win could weaken the U.S. Dollar as he is expected to spend big on stimulus and to take a freer approach to trade – likely boosting the Japanese Yen at the U.S. Dollar’s expense.

However, the risk in taking a short USD/JPY position ahead of the election is the possibility of a Trump victory or an inconclusive result, which should be supportive for the U.S. Dollar.

For a look at all of today’s economic events, check out our economic calendar.