FxWirePro: Bid EUR/JPY 6M risk reversals for delta hedging, 3m skews for vanilla puts and RVs for directional traders

It was almost to be expected. Following the parliamentary elections, the political situation in Italy seems to be unclear. Even if the results are still unclear the polls currently suggest: The bad outcome for the Socialists and the good results for the populists to the left and to the right will not lead to an outcome that will allow for the rapid formation of a government.

However, the news flow that emerged over the weekend seemed to suggest that somewhere in Europe there will always be an issue. If a government is finally being formed in one capital then problems arise in the next one. Who would blame the FX market for wishing Europe could have a more centralized governance structure? At the same time, the political difficulties also illustrate that a way towards any new governance structure would be quite bumpy. The euphoria about the French President’s European initiative supported the euro last spring. This euphoria is likely to crumble.

While please be noted that the bearish neutral risk reversals are still indicating bearish risks in longer tenors, while positively skewed IVs of the 3m tenor signifies the hedgers’ interests in OTM put strikes. These skews signal underlying spot FX to drop below 125 levels. While glance through above nutshell evidencing risk reversals, although these numbers have been bearish neutral, we can understand the highest hedging sentiments for bearish risks of this pair among G10 FX space. Bearish hedging remains intact.

To substantiate this standpoint, if you observe the technical chart of this pair, the major trend has been rising higher upto 61.8% Fibonacci levels from the lows of 109.205 levels but with struggling momentum. The technical momentum indicators have been substantiating overbought pressures in this consolidation phase (refer monthly chart). For more reading, refer our technical section.

Hence, keeping the both OTC and technical factors in mind, it is advisable to initiate below relative value trades.

Sell 6M EURJPY 25D risk-reversal (buy EUR calls - sell EUR puts), delta-hedged for risk-averse traders.

Buy 3M EUR puts/JPY calls vs. sell 3M 28D EUR puts/KRW calls for directional traders.

Buy 3m EURJPY ATM -0.49 delta puts for aggressive bears on hedging grounds.

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 34 levels (which is bullish), while hourly JPY spot index was at 99 (highly bullish) while articulating at 12:31 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest