USD/JPY Fundamental Weekly Forecast – Traders Increasingly Preparing for Excessive Volatility

The Dollar/Yen finished nearly flat last week as investors battled over which currency would be the preferred safe-haven asset ahead of Tuesday’s U.S. presidential election and amid a steep sell-off in U.S. equity markets. Traders showed little reaction to announcements from the Bank of Japan and the shelving of the latest round of U.S. fiscal stimulus talks.

Last week, the USD/JPY settled at 104.672, down 0.031 or -0.03%.

Volatility Jumps Across All Financial Markets

With both the Japanese Yen and at times, the U.S. Dollar wearing the hat of a safe-haven asset last week, prices in both currencies swung from the plus side to the negative side before settling nearly unchanged.

Reuters reported that gauges for implied currency swings in the foreign exchange markets jumped to their highest levels in nearly seven months on Wednesday as traders anticipated more volatility before the outcome of the U.S. elections next week.

Contracts for Euro and Japanese Yen implied volatility versus the U.S. Dollar expiring in a week climbed to their highest since early April.

At one point during the week, the contracts nearly doubled in just one day, in contrast to relative calm in the bond markets, indicating traders are increasingly preparing for more volatility in currency markets than in bonds, where unprecedented central bank stimulus has crushed market volatility.

Currency market volatility remains elevated as coronavirus cases proliferate and the outcome of Brexit negotiations remain unclear. But the spurt in short-end volatility indicators indicate growing concern about the U.S. election outcome.

In the equity markets, the widely watched VIX Index held below a June 2020 high. A gauge of bond market volatility held near one-week lows.

Weekly Forecast

Last week, one-week implied volatility gauges in the Yen tested their highest level in nearly seven months. This suggests investors are preparing for sharp price moves, with the biggest focus on the United States as it struggles to contain its coronavirus epidemic ahead of the pivotal election on November 3.

One reason for the increased volatility is that traders are pricing in a potential legal battle between Republicans and Democrats over how to count votes. This has raised the risk that the outcome of the election will be disputed.

If this week’s election result is contested by either Donald Trump or Joe Biden, or the result divides the Senate and the House of Representatives between the two parties, safe-haven currencies are likely to gain.

The key level to watch in the USD/JPY is 104.00. Trader reaction to this level will likely determine the next major move in the Forex pair.

Look for the U.S. Dollar to gain if we see a rebound in U.S. Treasurys. The Japanese Yen is likely to benefit from an extremely chaotic situation.