Since the end of August, the Japanese Yen has strengthened against all of its G10 peers, indicating that markets are paring back their risk exposures. And the options market suggests there could be more gains for the JPY as we enter the final stretch of what has certainly been a tumultuous year.

Such expectations are captured in the uptrend evident in the FXTM Japanese Yen index, which reflects the JPY’s performance against a basket of six major currencies, namely the US Dollar, Euro, Pound, Australian Dollar, New Zealand Dollar, and the Swiss Franc, all evenly-weighted. After registering its lowest level since 2019 on August 31st, this index has gained about 3.2 percent and is trading well above its 50-day simple moving average.

Compared to all other G10 currencies, markets appear most bullish on the Japanese Yen for the remainder of the year, judging by the positioning in the 25-delta risk reversals. Investors are well aware that November features major event risks such as the US presidential elections and also the final stretch of post-Brexit trade negotiations, and that both events have the potential to deliver outsized shocks across global markets. Coupled with the troubling resurgence of Covid-19 across the US and Europe, a phenomenon which threatens to derail the global economic recovery, no surprise then that demand for the safe haven Yen has been rising of late.

A rising tide of risk aversion over the coming weeks could see the FXTM JPY index breaking above the 103.317 mark for the first time since June, with a higher high adding further confirmation to its uptrend.

BOJ expected to hold policy rate

Keep in mind that the Bank of Japan is set to announce its latest monetary policy decision on Thursday, although the central bank is expected to leave things unchanged. The second wave of Covid-19 cases in Japan is abating, allowing the country to resume its economic recovery which diminishing the need for more financial support.

Still, any revisions to the BOJ’s GDP and inflation outlooks for fiscal 2020 will be closely monitored to assess the state of the world’s third-largest economy, and any major shift in expectations could be reflected in the JPY’s performance this week.

The downtrend in USDJPY is still very much intact, with the 50-day SMA guiding the currency pair downwards. USDJPY could retest the 104.0 psychological level over the coming days, especially if the US Dollar resumes its weakening bias once there’s more certainty after the US presidential elections.