FxWirePro: EUR/JPY OTC outlook and hedging vehicles

In this write-up, we particularly emphasize on short EUR vs CHF and JPY trades on ECB easing and poor growth (recent Italian political developments are unlikely to have a sustained impact on EUR; more on this below). 

The 1stchart informs these views as it crystallizes the currencies are likely to be the most susceptible to the global growth slowdown (y-axis) and where policy rates are substantially positive leaving central banks with room to ease further (x-axis).

While EURJPY trend has still been weaker in both minor and major trends amid some abrupt rallies. The European Central Bank (ECB) showed readiness to cut its key rate in its recent monetary policy. So, there is no reason for the euro to appreciate considerably in the short run. Let’s now quickly glance through OTC outlook:

Please be noted that the positively skewed IVs of 3m tenors that are also signifying the hedging interests for the bearish risks. The bids for OTM puts expect that the underlying spot FX likely to show further dips so that OTM instruments would expire in-the-money. 

Most importantly, to substantiate the above indications, we could see some minor positive shifts in existing bearish risk reversal set-up of EURJPY that indicates the long-term hedging sentiments across all tenors are still substantiating bearish risks amid minor abrupt upswings in the short-term. Please be noted that 3m IVs are overall OTC barometer is noteworthy size in the forex options market that can stimulate the underlying forex spot rate.

Hence, we’ve advocated buying 3m EURJPY (1%) ITM -0.79 delta puts for aggressive bears on hedging grounds as the mild abrupt upswings were contemplated earlier. 

Alternatively, we advocated shorts in futures contracts of mid-month tenors with a view to arresting potential dips. since further price dips are foreseen we would like to uphold the same strategy by rolling over these contracts for September month deliveries. Source: Saxobank