FxWirePro: Bullish, bearish scenarios, forecasts and hedging vehicle of Sterling and Yen

Bearish Scenarios Sterling:

1) Growth slows below 1% as consumers are squeezed by inflation and falling house prices.

2) Outright capital repatriation from slower moving long-term investors including central banks.

3) Initial Brexit talks flounder on the size of the UK's exit-bill.

Bullish Scenarios of Sterling:

1) The government pursues a lengthy transitional deal with the EU which maintains the trade status quo for 2-3 years.

2) The economy rebounds to 2.0-2.5%.

3) 3-4MPC members dissent for tighter policy at the Aug MPC/QIR,

4) Current a/c deficit shrinks below 2%.

Bullish Scenario of Yen:

1) The global investors’ risk aversion heightens significantly, possibly due to deterioration in North Korea situation and/or US-Japan trade frictions

Bearish Scenarios of Yen:

1) The hawkish shifts by other G10 central banks accelerates to lead wider rate spreads with Japan

2) Japanese government’s fiscal policy becomes more expansionary and the BoJ finances it, resulting in higher Japan’s inflation expectations.

As per the JPM’s forecasts, the spot GBPJPY could head towards 142 by Sept’17 drift back to 138 by Dec’17, drag further southwards at 137 by Mar’18 and 139 by June’18.

Hence, initiate below option strategy so as to arrest both upsides as well as downside risks on the check.

Add longs of 2 lots of 2m at the money gamma call options, simultaneously, add long in 1 lot of at the money -0.49 delta put of 4m expiry. It is advisable to prefer European style options.