FxWirePro: Capitalize on EUR/JPY shrinking IVs and 1m skewness and participate in dubious bullish exposure via RKOs

Please be noted that the implied vols of EURJPY crosses have been shrinking lower from the current 13.51% to 9.35% for 1w and 8.86% for 2w tenors in spite of the speeches of ECB and BoJ officials.

Positively skewed EUR vols and bearish neutral risk reversals have been shrinking to the lower level. Also, in longer tails, the EUR volatility smile remains flat compared with the rates vs vol correlation seen since 2015 and over the past week.

The steepness of the EURJPY risk-reversal curve renders back-end tenors better shorts, risk reversals have been bearish neutral. While positively skewed IVs towards OTM put strikes signifies hedgers’ bearish sentiments but puzzles prevailing uptrend of euro. The major trend has been in the consolidation phase that manages to break-out above 50% Fibonacci retracements and hit 61.8% levels from the lows of 109.5350 levels.

However, we prefer sticking to 2017 expiries (6M) since 2018 dates come with unpredictable Italian election risk. The EUR/gold risk-reversal curve is much flatter in comparison hence short tenors work fine. We enter short 6M 25D EURJPY risk-reversals (delta-hedged).

Contemplating above technical rationale, we could foresee more upside traction in spot prices, thus, we advocate maintaining the prevailing bullish exposure in EURJPY via a call RKO as JPY weakening is likely to be a slow grind rather than explosive.

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

Vol pts Positive smile theta participation in Euro bull-trend.

The macro theme of euro area leading outperformance remains dominant; maintain core EUR or proxy longs as growth and inflation data continue to be supportive. Accordingly, encourage long EUR vs in cash (vs USD) and through options in EURJPY (131.500 call, RKO 135.25).

Any spot holdings, wise to book returns in long EURJPY cash; but stay long EURJPY in options structure.

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing -39 (mildly bearish), while hourly JPY spot index was at 34 (mildly bearish) while articulating. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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