FxWirePro: Options strategies amid mounting hedging sentiments for bearish risks in EUR/JPY

Driving forces that lead to bearish EURJPY:

1) Eventual repatriation by US corporates-EUR accounts for a third of foreign profits.

2) Expectations for more hawkish than the expected stance of the BoJ if inflation expectations heighten.

3) EUR appreciation delays ECB policy normalization (change in QE guidance delayed until April).

4) Euro area growth relapses to 2.0-2.5%.

OTC outlook and hedging strategies:

Please be noted that the rising negative risk reversal numbers are still indicating mounting sentiments for hedging of bearish risks in 1w-3m tenors, while positively skewed IVs of the 2m tenor signifies the hedgers’ interests in OTM put strikes. These skews signal underlying spot FX to drop below 126 levels. While glance through above nutshell evidencing risk reversals, although these numbers have been bearish neutral for longer tenor but bearish risk sentiment remain intact, we can understand the highest hedging sentiments for bearish risks of this pair among G10 FX space.

Well, to substantiate this standpoint, if you observe the technical chart of this pair, the major trend has been rising higher upto 61.8% Fibonacci levels from the lows of 109.205 levels but couldn’t sustain these level, while bearish pattern candles pop up with RSI divergence and the struggling momentum. The technical momentum indicators have been substantiating overbought pressures in this consolidation phase (refer monthly chart). For more reading, refer our technical section.

Hence, keeping the both OTC and technical factors in mind, it is advisable to initiate below relative value trades.

Options strategies for hedging:

Buy 3M EUR puts/JPY calls vs. sell 3M 28D EUR puts/KRW calls for directional traders.

Buy 2m EURJPY ATM -0.49 delta puts for aggressive bears on hedging grounds.

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

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at -40 levels (which is bearish), while hourly JPY spot index was at -4 (neutral) while articulating at 07:36 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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