FxWirePro: JPY Crosses Hedging Sentiments Intensify Ahead of BoJ, Flirting With OTC Bearish Territories and Deploy Options Strategies

During the overnight session today, the Bank of Japan will meet for its monetary policy announcements and while Chinese PMIs are due. It is not expected any new policy signals from the BoJ. We look for how close the Chinese PMI will be on the 50 thresholds.

Please be noted that the intensified hedging activities in JPY crosses, both USDJPY and EURJPY display the highest OTC trading volumes among G10 FX-bloc. 

The positively skewed IVs of 2m tenors are still signifying the hedging interests for the bearish risks. The bids for OTM puts of these tenors are pointing towards that the underlying spot FX likely to break below 110.50 levels so that OTM instruments would expire in-the-money. 

While bearish neutral risk reversal numbers of USDJPY across all tenors are also substantiating downside risks amid momentary upswings in the short-run. IVs for 1w tenors are shrinking away which is good for put option writers, and 1m IVs are on higher side which is good for put holders.

Most importantly, OTC positions of noteworthy size in the forex options market can stimulate on the underlying forex spot rate. 

Amid the BoJ’s monetary policy announcement, the Market Pin Risk (MPR) of USDJPY signals that the underlying movement would remain in the range between 113.15 to 112.40 levels as this tool signifies the large no. of options expiring within this Friday. 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 113.15). The spot may trend around those strikes as the holders of the options will aggressively hedge the underlying delta.

Accordingly, 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: 112.840 levels, buy a 1M/1w 113.85/110.50 put spread (vols 7.48 vs 7.03 choice), wherein short leg is likely to function as the underlying spot FX remains within the MPR range or keeps mildly spiking, we would like to maintain the ITM long leg with the diagonal tenors with a view of arresting downside risks. 

Currency Strength Index: FxWirePro's hourly JPY spot index is flashing at -139 levels (which is bearish), while hourly USD spot index was at 50 (bullish) while articulating at (07:56 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex