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More positive market sentiment is weighing on the Japanese yen, which as a result is less in demand as a safe haven. However, the monetary policy outlook suggests that the appreciation trend of the Japanese currency is not yet over. USDJPY has been trading in sideway trend today (at 109.620 levels) so far.
The JPY has been one of the outperformers this year so far. The initial reason for the yen's strength was fears of a global recession that had arisen recently which fuelled demand for the Japanese currency as a safe haven. We ruled out slow normalization of monetary policy, as inflation in Japan has so far made no attempt to approach the BoJ's 2% inflation target.
The BoJ is no longer expected to raise the yield target in 2020 given the downgraded inflation outlook.
USDJPY OTC update is as follows:
You can observe the positive shift in bearish risk reversal numbers of USDJPY across 1-3m tenors is also substantiating downside risks amid momentary upswings in the short-run.
Most importantly, please be noted that the positively skewed IVs of 1m tenors are still signifying the hedging interests for the bearish risks. The bids for OTM puts of these tenors signal that the underlying spot FX likely to break below 107.50 levels so that OTM instruments would expire in-the-money.
OTC positions of noteworthy size in the forex options market can stimulate on the underlying forex spot rate. The Market Pin Risk report shows large options expiring in the next 5 days. Red strikes indicate sizeable open interest close to the current forex spot rate. FX Options strikes in large notional amounts, when close to the current spot level, can have a magnetic effect on spot prices (in this case, USDJPY has the highest interest towards forward point at 111.50). The spot may trend around those strikes as the holders of the options will aggressively hedge the underlying delta, compare spot and risk reversal curves that evidence the same.
Accordingly, a couple of days ago the debit put spreads have been advocated, we would like to uphold the same strategy but with diagonal tenors on hedging grounds.
While both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price rallies and bidding theta shorts in short run and 3m risks reversals to optimally utilize delta longs.
At spot reference of USDJPY: 109.602 levels, buy a 1M/1w 111.50/107.50 put spread (vols 7.60 vs 7.58 choice), wherein short leg is likely to function as the underlying spot FX keeps spiking, we would like to maintain the ITM long leg with the diagonal tenors on hedging grounds. Courtesy: Sentric, Saxo and JPM
Currency Strength Index: FxWirePro's hourly JPY spot index is flashing at -50 levels (which is bearish), while hourly USD spot index was at 52 (bullish) while articulating at (11:35 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
