Before we begin, let's just have a glance on OTC market positioning for hedging the uncertainty in USDJPY.

ATM IVs for next 1-2 months contracts reasonably higher at around 13-14% ahead of FOMC speeches and this month’s monetary policies from both sides (Fed and BoJ) that are scheduled latter part of this month.

Most importantly, the delta risk reversals in OTC FX for the pair have started adding highest positive changes among entire G10 currency space for all expiries which means investors are betting on dollar’s strength again.

So we believe any short upswings are the best advantage for speculators and may be utilized for shorts in hedging strategies by dubious bears so as to reduce the hedging costs but those who are aggressive on dollar’s strength, we had advocated a diagonal call spreads a few days ago and we are firm with this recommendation, so a leveraged call spread is welcome as the dollar buoyed at 100 while thanking to higher 2m volatility (Compare delta risk reversal with last week).

Since the Bank of Japan remains concerned by yen strength and could prevent a move below 100.

Brexit uncertainty is preventing volatility to collapse. USDJPY 2m/1m vol is, however, cheap, as it trades below the realized vol. The market should, therefore, experience larger spot deviations than what is discounted; making a tight call spread strikes 102/105 naturally highly leveraged.

At spot ref: 101.06, initiate longs in USDJPY 2m call strike 102.50 knock-out 99, short 1m call strike 105.

Risks: USDJPY hitting 99 and bouncing above 105.

If USDJPY hits 99 at any time, investors are left short a naked call strike 105 and are exposed to unlimited topside risks in the event of a sharp bounce from 99.

But the option would be 6 figures OTM, leaving time to either unwind the trade or implement a delta hedge.

USDJPY likely to bounce when risk aversion subsides:

Risk aversion is pressuring the USDJPY to fresh lows. Prices are gradually discounting the possibility of the activation of Article 50 by the UK (The Treaty of Lisbon) and there should be no rush to trigger it. The market is likely to take profit on risk-off positions, providing near-term relief to USDJPY.