FxWirePro: GBP/JPY what-if scenario analysis, OTC setup and hedging perspectives

Bearish GBPJPY scenarios:

1) CPI peaks and wage growth fails to accelerate to 3%;

2) The balance of payments pressure (capital repatriation from LT investors; current a/c stuck at 4-5%).

3) PM May faces a Conservative leadership challenge.

4) PM May elects for a harder Brexit model.

5) The expectations for more hawkish than expected stance of the BoJ if inflation expectations heighten

Bullish GBPJPY scenarios:

1) PM May sets out objectives for a soft Brexit (Norway model).

2) The economy rebounds to > 2% on stronger export demand and the curve prices four more hikes in 2 years.

3) The dovish shift of the BoJ monetary policy, resulting in higher stock prices and JPY depreciation.  

OTC  outlook and derivatives hedging strategies:

GBPJPY has been edgy at 152.121 levels ever since the occurrence of hanging man pattern candle which is bearish in nature, we anchor the prevailing bearish stance of is backed by both leading oscillators, one can think of shorts in this pair only for the short-term basis. For more readings, refer our technical section.

OTC outlook and Hedging Perspectives (GBPJPY):

Please be noted that the positively skewed IVs of GBPJPY of 3m tenors signify the hedgers’ interests in OTM put strikes (upto 146 levels) and isn’t this a luring factor for a shrewd bear. While 1w/3m IVs of ATM contracts are trending above 11.05% and 10.69% respectively that are the suitable combinations for diagonal put ratio spreads.

Because the higher IVs with well-adjusted positive skewness signify the hedgers’ interest for both OTM call/put strikes. In usual circumstances, long option position needs higher IVs for significant change in vega. Hence, we capitalize on buzzing IVs in 3m tenor for long leg and improve odds on options below strategy.

The aggressive volatility investors want to capture GBP should consider buying ATM put instruments and/or being long of the smile convexity, against ATM volatility. Thus, ATM strikes are perceived to be more conducive than the OTMs.

Further GBPJPY upswings and/or weakness suggest building directional strategies as given below and volatility patterns at the same time.

1)In order to mitigate downside risks and keep them on the check, we advocate adding longs in 2 lots of ATM -0.49 delta puts of 3m tenor while writing 1 lot of 2% OTM put of 1m tenor.

Contemplating IV skewness and ongoing technical trend, we foresee the value of ATM options would likely rise significantly as the IVs seem to be favoring long legs of ATM strikes.

2) Buy GBPJPY – USDJPY 1Y ATM straddle spread, equal JPY vega.

3) Alternatively, on hedging grounds, we advocate shorting futures contracts of mid-month tenors as the underlying spot FX likely to target southwards 145 levels in the medium run.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.

Currency Strength Index: FxWirePro's hourly GBP spot index has turned into 31 (which is slightly bullish ahead of average earnings index and inflation reports), while hourly JPY spot index was at shy above -121 (bearish) while articulating (at 10:50 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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