Talking Points:

• USD/JPY Technical Strategy: watching move to bottom of bullish channel for pivot
• JPY MXN Demanding Focus Ahead of Nov. 8 Presidential Election
• USD/JPY False Breakout Coincides with US SP 500 Breakdown

USD/JPY has had a rocky start to November, and the volatility has had little if anything to do with the Central Bank meetings of the Bank of Japan and the Fed. All focus has been on around the Presidential Election in the U.S., which have had volatile polling showing both Trump Clinton edging a lead depending on the poll you see.

The tight race has led to a lot of volatility in the Mexican Peso and the Japanese Yen. The Mexican Peso has been a proxy for the presumed damage of trade relations should Trump win the presidency, whereas the JPY has strengthened on the presumed global uncertainty that would likely lead to short-term selling in risk assets until the dust settles on November 9 regardless of who wins.

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We have also seen a ~2% decline in the DXY from late October through the Federal Reserve announcement on Wednesday favored waiting for a rate hike presumably due to the election. The market is pricing in a near 80% probability of a rate hike when the Federal Reserve meets on December 14. However, there is not a priced in second hike that would take the rate between 0.75-1% through 2018. Therefore, it is unlikely that there will be a Fed surprise that would strengthen the USD, which leaves the heavy lifting of USD/JPY on the Yen.

One last note from the options market is that there remains a heavy negative skew on the one month 25-delta Risk Reversal on JPY crosses. A negative skew shows that there is an obvious bias for Put demand over Call demand, which means there is an options market preference to buy JPY and not sell JPY at a ratio of 2.09:1. As of Thursday, the bias for puts calls at a ratio of is more prevalent in commodity currencies and the British Pound. While there are signs that the upside could pick up after the election, it’s obvious that there is a strong resistance from the premium that options traders are paying to capture JPY upside.

D1 USD/JPY Chart: Volatility Anticipated Ahead Of Election, Support Anticipated at 102.16

Chart Created by Tyler Yell, CMT, Courtesy of TradingView

Driven by a persistent fall in the US Dollar and knee-jerk moves higher in JPY around the election polling presenting uncertainty around the outcome, USDJPY has traded around 103 on Thursday.

From a technical standpoint, it’s worth watching three key levels that appear on the chart above. The first is the Ichimoku Cloud that aligns with the key Fibonacci retracement zone. I define the key retracement zone as 38.2-61.8% of the prior advance, which consumes 103.45-102.16 on the chart. There is also an alignment of a corrective low on October 10 that aligns with the 50% retracement at 102.80, where we should watch to see if the price can remain above there on a closing basis.

The next component of support to watch on the chart above is the Ichimoku Cloud, which goes down to 101.80. Given how well Ichimoku has framed strong trends in USD/JPY over the years, it’s worth watching to see if this first move of the price above the Cloud holds, which could precede a breakout if the DXY weakness can reverse.

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Lastly, the Andrew’s Pitchfork Channel drawn off the extreme close on August 16 that registered an extreme for RSI (5) and pivots in September. The lower-bound channel or lower parallel to the median line align with 102/103. Naturally, we’re simply looking for favorable odds or an edge, which doesn’t surface in my opinion until resistance begins breaking.

For now, the move lower is being watched for a bottoming process. The resistance levels that if broken would encourage bulls would be a close above the 21-DMA at 103.97 and the 9-Period Midpoint or Kijun-Sen at 104.08.

Shorter-Term USD/JPY Technical Levels: November 3, 2016

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.